Document 39266

U.S. International Trade Commission
COMMISSIONERS
Deanna Tanner Okun, Chairman
Jennifer A. Hillman, Vice Chairman
Marcia E. Miller
Stephen Koplan
Robert A. Rogowsky
Director of Operations
Robert B. Koopman
Director of Economics
Address all communications to
Secretary to the Commission
United States International Trade Commission
Washington, DC 20436
U.S. International Trade Commission
Washington, DC 20436
www.usitc.gov
The Impact of Trade Agreements:
Effect of the Tokyo Round,
U.S.-Israel FTA, U.S.-Canada FTA,
NAFTA, and the Uruguay Round on
the U.S. Economy
Investigation No. TA-2111-1
Publication 3621
August 2003
This report was prepared principally by
Research Division
Hugh M. Arce, Chief
Kyle Johnson, Project Leader
Russell Hillberry, Deputy Project Leader
Primary Reviewers
Arona Butcher, Jan Summers
Major Contributors
Office of Economics
Laurie-Ann Agama, Edward Balistreri, Michael Barry,
Nannette Christ, Judith Dean, Michael Ferrantino, James Fetzer,
Alan Fox, Thomas Jennings, Joshua Levy, and Ted Wilson
Office of Industries
John Davitt, Industries Coordinator
Gail Burns, William Chadwick, Jr., Roger Corey, Alfred Dennis,
Lisa Ferens, Cynthia Foreso, Christopher Johnson, Eric Land,
Deborah McNay, Michael Nunes, Laura Polly, Ryan Schroeder,
Steve Wanser, and Linda White
Supporting assistance was provided by:
Cecelia Allen, Monica Reed, and Wanda Tolson
Office of Publishing
Joyce Bookman, Paulette Henderson,
Keven Blake, and John Robertson
PREFACE
This report has been prepared in response to a requirement of the Trade
Act of 2002, enacted on August 6, 2002. Section 2111 of that Act requires the
International Trade Commission (USITC, or the Commission) to report to the
Committee on Finance of the Senate and the Committee on Ways and Means of
the House of Representatives regarding the economic impact on the United
States of the following trade agreements: the Tokyo Round of Multilateral
Trade Negotiations, the United States-Israel Free Trade Agreement, the United
States-Canada Free Trade Agreement, North American Free Trade Agreement,
and the Uruguay Round Agreements.
The Commission solicited public comment for this investigation by
publishing notices in the Federal Register of September 19, 2002 (67 F.R. 182)
and March 3, 2003 (68 F.R. 41). A public hearing was held on January 14,
2003. Appendix A contains a copy of section 2111 of the Trade Act of 2002,
and of the Federal Register notices. Appendix F contains a list of witnesses
who appeared at the hearing and a summary of the views of these witnesses
and other interested parties who submitted written statements.
i
ABSTRACT
This report has been prepared in response to a requirement of the Trade
Act of 2002 (19 U.S.C. 3811), enacted on August 6, 2002.1 Section 2111 of
that Act requires the International Trade Commission to report to the Senate
Finance Committee and the House Ways and Means Committee regarding the
economic impact on the United States of the following trade agreements: the
Tokyo Round of Multilateral Trade Negotiations, the United States-Israel Free
Trade Agreement, the United States-Canada Free Trade Agreement, North
American Free Trade Agreement, and the Uruguay Round Agreements.
Assessing the economic impact of the five specified agreements on the
United States is complicated by the difficulty in quantitatively specifying many
of the actual policies implemented by the agreements, by the difficulty in
disentangling these effects from the many other changes that have taken place
over the past 25 years affecting the national economy, and by the difficulty of
isolating the effects of the agreements from each other, since their
implementation often overlaps. Nevertheless, it is quite clear that the major
multilateral agreement (the Tokyo and Uruguay Round Agreements) have had
more important effects on the economy than have the preferential agreements
(U.S.-Israel, U.S.-Canada, and NAFTA). Further, measurable trade policy
changes such as tariff reductions have had a large effect on trade growth, but
they have accounted for less than half of the overall growth in trade. After
accounting for the effects of trade policy, the residual growth in trade (over
half) would be due to changes in population, productivity, technological
progress, or other trends.
Findings contained in the report are derived from several types of analysis.
Most importantly, an extensive review of economic literature covers most of
the direct and indirect effects of trade policy on the U.S. economy. An analysis
of trends in industry trade, output, and employment examines linkages
between these trends and provisions of the trade agreements. Original empirical
research describes the growth of trade with Mexico in response to the
preferences that that country receives under NAFTA and the effects of trade
policy in generating new trade flows. Also, an innovative simulation model and
data base, applied consistently to the five agreements, provides insight into the
relative magnitudes of their effects and provides a calculation of the scale of
these effects derived from plausible assumptions in a theory-based framework.
1
Pub. L. 107-210, 116, 2111, Stat. 933, 1021.
iii
CONTENTS
Page
Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
i
Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iii
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
xxi
Chapter 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Scope of the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Approach of the study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Organization of the report . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
2
3
Chapter 2. Negotiation of Trade Agreements under Trade
Promotion Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legislation and agreements approved under trade
promotion authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tariff vs. nontariff barrier negotiating authority . . .
Presidential authority to negotiate nontariff
barriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Congressional fast track implementing
procedures . . . . . . . . . . . . . . . . . . . . . . . . . . .
Past and present trade agreement authority . . . .
Regional and bilateral trade agreements . . . . . . . . .
1979 Tokyo Round Agreements . . . . . . . . . . . . . . .
Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the negotiations . . . . . . . . . . . . . . . . .
Overview of the agreement . . . . . . . . . . . . . . . .
Tariff barriers . . . . . . . . . . . . . . . . . . . . . . .
Nontariff barriers . . . . . . . . . . . . . . . . . . . . .
Tokyo round bilateral negotiations . . . . . . .
Impact of the agreement . . . . . . . . . . . . . . . . . .
1985 United States-Israel Free Trade Area
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
7
7
14
14
15
15
16
18
18
18
19
19
20
21
22
23
v
CONTENTS—Continued
Page
Chapter 2. Negotiation of Trade Agreements under Trade
Promotion Authority–Continued
Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the negotiations . . . . . . . . . . . . . . . .
Overview of the agreement . . . . . . . . . . . . . . . .
1988 United States-Canada Free Trade
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the negotiations . . . . . . . . . . . . . . . .
Overview of the agreement . . . . . . . . . . . . . . . .
Impact of the agreement . . . . . . . . . . . . . . . . . .
1993 North American Free Trade Agreement . . . . .
Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the negotiations . . . . . . . . . . . . . . . .
Overview of the agreement . . . . . . . . . . . . . . . .
Objectives . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade in goods . . . . . . . . . . . . . . . . . . . . . .
Technical barriers to trade . . . . . . . . . . . . .
Government procurement . . . . . . . . . . . . . .
Investment and services . . . . . . . . . . . . . . .
Intellectual property rights . . . . . . . . . . . . .
Institutional provisions . . . . . . . . . . . . . . . .
Exceptions . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of the agreement . . . . . . . . . . . . . . . . . .
1994 Uruguay round agreements . . . . . . . . . . . . . . .
Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review of the negotiations . . . . . . . . . . . . . . . .
Overview of the agreement . . . . . . . . . . . . . . . .
Goods, services, and intellectual property .
Single integrated package of agreements . .
WTO agreement and integral annexes . . . .
GATT 1947 vs. GATT 1994 . . . . . . . . . . .
Marrakesh protocol of national schedules
of commitments . . . . . . . . . . . . . . . . . . .
Impact of the agreement . . . . . . . . . . . . . . . . . .
vi
23
23
24
24
24
25
25
26
26
26
27
27
28
29
30
30
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31
31
32
32
33
33
34
34
34
35
35
36
37
37
CONTENTS—Continued
Page
Chapter 3. Economic Changes in the United States
Since the Beginning of the Tokyo Round . . . . . . . . . . . . .
Structure of U.S. economy . . . . . . . . . . . . . . . . . . . . . . . . . .
Cross-industry reallocation and frictional
unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Post-employment experiences of displaced
workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic growth and productivity . . . . . . . . . . . . . . . . . . . .
Growth in factor inputs . . . . . . . . . . . . . . . . . . . . . . . . . .
Productivity measures and changes in productivity . . . .
Possible sources of output and productivity growth . . . .
Changes in the distribution of wages across measures
of skill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Measuring the premium paid to skilled labor . . . . . . . . .
Historical experience . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter 4. The Effects of Trade Liberalization on
the U.S. Economy in Historical Perspective:
A Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Types of literature reviewed . . . . . . . . . . . . . . . . . . . . . .
Methodologies employed in the literature . . . . . . . . . . .
Principal findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Economic effects attributed to particular agreements
negotiated under trade promotion authority . . . . . . . . . . .
Simulation analyses of U.S. trade policy changes . . . . .
Overall impact on U.S. economy . . . . . . . . . . . . . . .
Scale economies and imperfect competition . . . . . .
Sectoral results . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-tariff barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment dynamics . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General economic effects of trade liberalization in the
“Fast-Track” era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Studies evaluating sources of trade growth . . . . . . . . . . .
39
40
47
49
51
52
53
55
56
57
58
63
63
63
64
66
68
68
70
80
82
84
86
87
88
88
vii
CONTENTS—Continued
Page
Chapter 4. The Effects of Trade Liberalization on
the U.S. Economy in Historical Perspective:
A Literature Review—Continued
The role of trade policy in explaining trade
growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimates of the effects of the agreements on trade . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effects on growth and productivity . . . . . . . . . . . . . . . . .
Trade liberalization and GDP growth . . . . . . . . . . . .
Direct links between unilateral liberalization
and growth . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indirect links between unilateral and
multilateral liberalization, investment,
and growth . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade liberalization and productivity . . . . . . . . . . . .
Global competition and the productivity of
exporting and import-competing firms . . . . .
Reductions in price distortions and production
costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDI, technological spillovers, and firm
productivity . . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effects on labor outcomes . . . . . . . . . . . . . . . . . . . . . . . .
Economic theory . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Empirical studies of wage inequality . . . . . . . . . . . .
Outsourcing and wages . . . . . . . . . . . . . . . . . . .
Agreement-specific analysis . . . . . . . . . . . . . . . . . . .
Non-agreement-specific analysis . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effects on product variety . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
viii
89
93
93
100
100
101
102
105
107
107
111
112
113
114
115
117
121
122
123
125
125
128
CONTENTS—Continued
Page
Chapter 5. Industry Sector Analysis
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . . . . .
AFL-CIO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benjamin Goodrich . . . . . . . . . . . . . . . . . . . . . . . . .
International intellectal property alliance . . . . . . . . .
National association of manufacturers . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . .
Air transportation association . . . . . . . . . . . . . .
Machinery and Electronics . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel FTA . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . .
National electrical manufacturers association . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . .
129
133
133
133
135
135
136
136
136
137
137
137
141
141
144
145
146
146
147
147
153
153
155
155
158
161
162
162
162
162
ix
CONTENTS—Continued
Page
Chapter 5. Industry Sector Analysis—Continued
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel FTA . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . .
Blue diamond growers . . . . . . . . . . . . . . . . . . . .
Tokyo round and Uruguay round . . . . . . . .
U.S.-Israel free trade agreement . . . . . . . . .
U.S.-Canada free trade agreement . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida citrus mutual . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida tomato exchange . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National milk producers federation and
U.S. dairy export council . . . . . . . . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . .
The U.S.-Canada free trade agreement . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel free trade agreement . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . .
The ranchers-cattlemen action legal fund-united
stockgrowers of America . . . . . . . . . . . . . . . .
U.S.-Canada FTA and NAFTA . . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel free trade agreement . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . .
Chemicals and allied products . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
x
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183
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185
185
186
186
CONTENTS—Continued
Page
Chapter 5. Industry Sector Analysis—Continued
Effect of trade agreements on the sector . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel FTA . . . . . . . . . . . . . . . . . . . . . . . . .
The U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . .
Generic pharmaceutical association . . . . . . . . . .
Pharmaceutical research and manufacturers of
America . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mineral and metal products . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel FTA . . . . . . . . . . . . . . . . . . . . . . . . .
The U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . .
American restaurant china council . . . . . . . . . . .
Tokyo and Uruguay rounds . . . . . . . . . . . .
Nucor corporation and TXI chaparral steel . . . .
Specialty steel industry of North America . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . .
Tile council of America inc. . . . . . . . . . . . . . . .
Western economic analysis center . . . . . . . . . . .
Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The U.S.-Israel FTA . . . . . . . . . . . . . . . . . . . . .
The U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . .
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192
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213
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237
240
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CONTENTS—Continued
Page
Chapter 5. Industry Sector Analysis—Continued
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
Forest and fishery products . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel FTA . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . .
American forest and paper association . . . . . . .
Tokyo and Uruguay rounds . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States tuna foundation . . . . . . . . . . . . . .
Energy and Fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous products . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel FTA . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . .
American brush manufacturers association . . . .
Textiles and Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of trade agreements on the sector . . . . . . . . .
Tokyo round . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S.-Israel FTA . . . . . . . . . . . . . . . . . . . . . . . . .
xii
240
243
244
244
249
251
251
254
254
257
257
257
258
258
258
259
264
266
266
271
271
276
277
277
281
281
284
285
285
285
285
290
290
292
CONTENTS—Continued
Page
Chapter 5. Industry Sector Analysis—Continued
U.S.-Canada FTA . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uruguay round . . . . . . . . . . . . . . . . . . . . . . . . .
Views of interested parties . . . . . . . . . . . . . . . . . . . .
Association of the nonwoven fabrics industry . .
Chapter 6. The Impact of NAFTA Preferences on U.S.Mexican Trade: A Sectoral Approach . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Previous studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NAFTA and North American trade . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Analytical framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of U.S. NAFTA tariff preferences on
Mexican import share . . . . . . . . . . . . . . . . . . . . . .
Importance of U.S. NAFTA tariff preferences for
Mexico’s import share . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of Mexican NAFTA tariff preferences on
U.S. import share . . . . . . . . . . . . . . . . . . . . . . . . .
Importance of Mexican NAFTA tariff preferences for
U.S. import share . . . . . . . . . . . . . . . . . . . . . . . . .
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter 7. Comparative Simulations of the Economywide
Effects of the Five Trade Agreements Negotiated Under
Fast-Track Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Baseline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Detailed results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
295
295
298
299
299
301
301
303
304
304
308
313
315
315
316
319
320
320
321
323
325
325
327
330
333
334
xiii
CONTENTS—Continued
Page
Chapter 8. Growth in Product Variety . . . . . . . . . . . . . . . .
Theoretical discussion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Historical experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New varieties in trade growth, a decomposition . . . . . . . . . .
Method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Econometrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Measuring the economic effects of increased product
variety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Appendices
A. Authorizing legislation and federal register notices . . . . . . .
B. Chapter 6 technical annex . . . . . . . . . . . . . . . . . . . . . . . . . . .
C. Chapter 7 technical annex . . . . . . . . . . . . . . . . . . . . . . . . . . .
D. Chapter 8 technical annex . . . . . . . . . . . . . . . . . . . . . . . . . . .
E. Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F. Witness list and views of interested parties . . . . . . . . . . . . . .
Tables
3-1.
Gross domestic product by industry sector . . . . . . . . . . .
3-2.
Employment by industry sector . . . . . . . . . . . . . . . . . . .
3-3.
Changes in value added by manufacturing sector,
1977-2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3-4.
Contributions of labor, capital, and productivity to
U.S. private non-farm business output per hour . . . . .
4-1.
Summary of selected simulation studies: Predicted
impact on U.S. welfare, imports, and exports . . . . . . .
4-2.
Summary of selected simulation studies: Predicted
impact on output, exports, and import by
sector-NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5-1.
Real private gross domestic product and employment
by industry sector, 1980 and 2001 . . . . . . . . . . . . . . .
5-2.
U.S. trade by sector, 1980 and 2001 . . . . . . . . . . . . . . . .
xiv
341
342
344
344
346
346
347
350
351
A-1
B-1
C-1
D-1
E-1
F-1
41
45
46
55
71
75
132
134
CONTENTS—Continued
Page
Tables--Continued
5-3.
Services: U.S. trade with Canada and Mexico,
1988-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5-4.
Machinery and electronics sector: U.S. shipments,
imports, exports, apparent consumption, ratios of
imports to consumption and exports to shipments,
total employment, production workers, hourly wages,
and productivity, 1978-2001 . . . . . . . . . . . . . . . . . . . .
5-5.
Machinery and electronics: Trade issues
addressed in trade agreements and U.S. tariffs . . . . . .
5-6.
Machinery and electronics: U.S. trade
with Israel, 1984-2001 . . . . . . . . . . . . . . . . . . . . . . . .
5-7.
Machinery and electronics: U.S. trade with
Canada and Mexico, 1987-2001 . . . . . . . . . . . . . . . . .
5-8.
Agricultural products: U.S. shipments, imports,
exports, apparent consumption, ratios of imports to
consumption and exports to shipments, total
employment, production workers, hourly wages, and
productivity, 1978-2001 . . . . . . . . . . . . . . . . . . . . . . .
5-9.
Agricultural products: Trade issues addressed in trade
agreements and U.S. tariffs . . . . . . . . . . . . . . . . . . . . .
5-10. Agricultural products: U.S. trade with Israel,
1984-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5-11. Agricultural products: U.S. trade with Canada and
Mexico, 1987-2001 . . . . . . . . . . . . . . . . . . . . . . . . . .
5-12. Chemicals and allied products: U.S. shipments,
imports, exports, apparent consumption, ratios
of imports to consumption and exports to
shipments, total employment, production
workers, hourly wages, and productivity,
1978-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5-13. Chemicals and allied products: Trade issues
addressed in trade agreements and U.S. tariffs . . . . . .
5-14. Chemicals and allied products: U.S. trade with
Israel, 1984-2001, . . . . . . . . . . . . . . . . . . . . . . . . . . .
142
148
154
156
159
164
169
172
175
187
193
195
xv
CONTENTS—Continued
Page
Tables—Continued
5-15. Chemicals and allied products: U.S. trade with Canada
and Mexico, 1987-2001 . . . . . . . . . . . . . . . . . . . . . . .
5-16. Minerals and metals products: U.S. shipments,
imports, exports, apparent consumption, ratios of
imports to consumption and exports to shipments,
total employment, production workers, hourly wages,
and productivity, 1978-2001 . . . . . . . . . . . . . . . . . . .
5-17. Minerals and metals products: Trade issues addressed
in trade agreements and U.S. tariffs . . . . . . . . . . . . . .
5-18. Minerals and metals products: U.S. trade with Israel,
1984-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5-19. Minerals and metals products: U.S. trade with Canada
and Mexico, 1987-2001 . . . . . . . . . . . . . . . . . . . . . . .
5-20. Transportation equipment: U.S. shipments, imports,
exports, apparent consumption, ratios of imports
to consumption and exports to shipments, total
employment, production workers, hourly wages,
and productivity, 1978-2001 . . . . . . . . . . . . . . . . . . .
5-21. Transportation equipment: Trade issues addressed
in trade agreements and U.S. tariffs . . . . . . . . . . . . . .
5-22. Transportation equipment: U.S. trade with Israel,
1984-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5-23. Transportation equipment: U.S. trade with Canada
and Mexico, 1987-2001 . . . . . . . . . . . . . . . . . . . . . . .
5-24. Forest and fishery products: U.S. shipments,
imports, exports, apparent consumption, ratios
of imports to consumption and exports to shipments,
total employment, production workers, hourly wages,
and productivity, 1978-2001 . . . . . . . . . . . . . . . . . . .
5-25. Forest and fishery products: Trade issues addressed
in trade agreements and U.S. tariffs . . . . . . . . . . . . . .
5-26. Forest and fishery products: U.S. trade with Israel,
1984-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
xvi
197
204
212
214
217
227
235
238
241
245
250
252
CONTENTS—Continued
Page
Tables—Continued
5-27. Forest and fishery products: U.S. trade with Canada and
Mexico, 1987-2001 . . . . . . . . . . . . . . . . . . . . . . . . . .
5-28. Energy and fuel products: U.S. shipments, imports,
exports, apparent consumption, ratios of
imports to consumption and exports to shipments,
total employment, production workers,
hourly wages, and productivity, 1978-2001 . . . . . . . .
5-29. Energy and fuel products: Trade issues addressed
in trade agreements and U.S. tariffs . . . . . . . . . . . . . .
5-30. Energy and fuel products: U.S. trade with Israel,
1984-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5-31. Energy and fuel products: U.S. trade with Canada
and Mexico, 1987-2001 . . . . . . . . . . . . . . . . . . . . . . .
5-32. Miscellaneous products: U.S. shipments, imports,
exports, apparent consumption, ratios of imports to
consumption and exports to shipments, total
employment, production workers, hourly wages,
and productivity, 1978-2001 . . . . . . . . . . . . . . . . . . .
5-33. Miscellaneous products: Trade issues addressed in trade
agreements and U.S. tariffs . . . . . . . . . . . . . . . . . . . . .
5-34. Miscellaneous products: U.S. trade with Israel,
1984-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5-35. Miscellaneous products: U.S. trade with Canada
and Mexico, 1987-2001 . . . . . . . . . . . . . . . . . . . . . . .
5-36. Textiles and apparel products: U.S. shipments,
imports, exports, apparent consumption, ratios of
imports to consumption and exports to shipments,
total employment, production workers, hourly
wages, and productivity, 1978-2001 . . . . . . . . . . . . .
5-37. Textiles and apparel products: Trade issues addressed
in trade agreements and U.S. tariffs . . . . . . . . . . . . . .
5-38. Textiles and apparel products: U.S. trade with Israel,
1984-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
255
260
265
267
269
273
278
279
282
287
291
293
xvii
CONTENTS—Continued
Page
Tables—Continued
5-39. Textiles and apparel products: U.S. trade with Canada
and Mexico, 1987-2001 . . . . . . . . . . . . . . . . . . . . . . .
6-1.
The impact of U.S. NAFTA preferences:
Manufacturing sector . . . . . . . . . . . . . . . . . . . . . . . . .
6-2.
Explaining the growth of Mexico’s share of U.S.
manufactured imports, 1990-2001 . . . . . . . . . . . . . . .
6-3.
The impact of Mexican NAFTA preferences:
Manufacturing sector . . . . . . . . . . . . . . . . . . . . . . . . .
6-4.
Explaining the growth of U.S. share of Mexican
manufactured imports, 1991-1999 . . . . . . . . . . . . . . .
8-1.
Decomposition of trade growth . . . . . . . . . . . . . . . . . . . .
8-2.
Decomposition of import growth in continued
products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8-3.
SIC share of import growth in continued products
with new trade partners . . . . . . . . . . . . . . . . . . . . . . . .
8-4.
SIC share of import growth in continued products
with new trading partners, by new trading partner . . .
8-5.
SIC share of import growth in continued products
with new trade partners by product . . . . . . . . . . . . . . .
B-1.
Sector classifications and descriptions . . . . . . . . . . . . . .
B-2.
Explaining Mexican shares of U.S. imports:
Manufacturing sector, 1989-2001 . . . . . . . . . . . . . . .
B-3.
Explaining Mexican shares of U.S. imports:
Apparel and textiles sectors, 1989-2001 . . . . . . . . . .
B-4.
Explaining U.S. shares of Mexican imports:
Manufacturing sector, 1991-1999 . . . . . . . . . . . . . . .
xviii
296
316
317
322
322
347
348
348
349
350
B-9
B-10
B-11
B-12
CONTENTS—Continued
Page
Tables—Continued
D-1.
Trade cost changes and growth in imported
SIC 4-digit product-country pairs, 1978-2001 . . . . . .
D-2. Explaining the growth of new product-country
pairs in U.S. imports, 1978-2001 . . . . . . . . . . . . . . . .
D-3. Regression of import variety changes on trade
cost changes for all sectors and for industry
subsector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
D-4. Regression of import variety changes on trade
cost changes for subsamples of regressors . . . . . . . . .
D-5. Regression of import variety changes on trade
cost changes for subsamples of countries
defined by date of GATT/WTO accession . . . . . . . . .
D-6. Regression of import variety changes on trade
cost changes for subsamples of countries
defined by levels of development . . . . . . . . . . . . . . . .
D-7. Parameter inputs into model calibration . . . . . . . . . . . . .
D-5
D-6
D-7
D-8
D-9
D-10
D-14
Figures
ES-1. Simulated marginal welfare impact of removing agreements
in 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
xxii
1-1.
Benchmark quantity indices for U.S. real income and
trade, 1978-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
2-1.
Timeline of events related to fast track negotiating
authority, 1934-2002 . . . . . . . . . . . . . . . . . . . . . . . . .
9
3-1.
Output per hour in manufacturing and business
sectors, 1974-2002 (1974=100) . . . . . . . . . . . . . . . . .
45
3-2.
U.S. civilian unemployment rate, changes in real
GDP and implementation dates of significant
U.S. trade agreements, 1974-2001 . . . . . . . . . . . . . . .
48
3-3.
U.S. unemployment rate and trade deficit . . . . . . . . . . . .
50
3-4.
Measures of real labor compensation (1979=100) . . . . .
58
3-5.
Real production and non-production earnings in
manufacturing, 1977-2000 (Production
workers, 1977=100) . . . . . . . . . . . . . . . . . . . . . . . . . .
60
xix
CONTENTS—Continued
Page
Figures—Continued
3-6.
Real earnings by educational attainment, 1975-1999
(High School diploma, 1975=100) . . . . . . . . . . . . . .
6-1.
Simple average U.S. tariff on imports from Mexico,
1993 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-2.
Simple average U.S. tariff on non-NAFTA imports,
1993 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-3.
Average U.S. tariff preference toward Mexico:
Pre and post NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . .
6-4.
Mexican share of U.S. imports by tariff preference:
1989, 1993, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-5.
Mexico’s simple average tariff on imports from
the United States: 1991, 1999 . . . . . . . . . . . . . . . . . .
6-6.
Mexico’s simple average tariff on non-NAFTA
imports: 1991, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . .
6-7.
Mexican tariff preference margin toward United States:
Pre and post NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . .
6-8.
U.S. share of Mexico’s imports by tariff preferences:
1991, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7-1.
Change in welfare relative to baseline that includes
trade agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7-2.
Marginal welfare impact of removing agreements
in 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7-3.
Baseline real gross domestic product . . . . . . . . . . . . . . .
7-4.
Baseline real imports and exports . . . . . . . . . . . . . . . . . .
7-5.
Benchmark quantity indices for real income and trade . .
7-6.
Change in aggregate imports relative to baseline . . . . . .
8-1.
U.S. import sources per SIC4 commodity . . . . . . . . . . .
C-1.
Production in the USITC model . . . . . . . . . . . . . . . . . . .
C-2.
Product and commodity structure . . . . . . . . . . . . . . . . . .
xx
61
305
306
307
309
310
311
312
314
331
333
335
336
337
338
345
C-5
C-6
08/03
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The Impact of Trade Agreements: Effect of the Tokyo Round, U.S.-Israel FTA,
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The Impact of Trade Agreements: Effect of the
Tokyo Round, U.S.-Israel FTA, U.S.-Canada FTA,
NAFTA, and the Uruguay Round on the
U.S. Economy
Executive Summary
Section 2111 of the Trade Act of 20021 directs the U.S. International Trade
Commission to report to the Senate Finance Committee and the House Ways
and Means Committee regarding the economic impact on the United States of
the United States-Israel Free Trade Agreement, the United States-Canada Free
Trade Agreement (CFTA), the North American Free Trade Agreement
(NAFTA), the Uruguay Round Agreements, and the Tokyo Round of
Multilateral Trade Negotiations.2 These agreements were negotiated and
ratified under so-called “fast-track” authority,3 which authorized the President
to negotiate trade agreements on behalf of the United States. Fast-track
authority also defined procedures for Congressional oversight of the
negotiations and for Congressional input into the drafting of implementing
legislation, and obliged Congress to vote to either accept or reject the
implementing legislation without amendment.
A number of analytical challenges complicate measurement of the
economic effects of trade agreements. Nonetheless, a broad body of economic
research can be brought to bear on the issue. The research suggests that these
trade agreements contributed to the growth in U.S. trade, but that other sources
of trade growth were probably at least as important as the trade agreements.
Research reviewed in this report links trade growth to higher average living
standards, increased productivity, and increased earnings inequality. Direct
links between the trade agreements and these phenomena are much weaker. A
number of issues warrant further research, including the effects of unmeasured
policy changes and growth in foreign outsourcing.
1 “Not later than 1 year after the date of enactment of this Act, the International
Trade Commission shall report to the Committee on Finance of the Senate and the
Committee on Ways and Means of the House of Representatives regarding the economic
impact on the United States of...
(1) The United States-Israel Free Trade Agreement
(2) The United States-Canada Free Trade Agreement
(3) The North American Free Trade Agreement
(4) The Uruguay Round Agreements (and)
(5) The Tokyo Round of Multilateral Trade Negotiations,” Pub. L. 107-210, 2111,
116 Stat. 933, 1021
2 The specific provisions of the agreements that emerged from these negotiations are
detailed in chapter 2.
3 The Trade Act of 2002 re-authorized fast track procedures along with additional
requirements under the name “Trade Promotion Authority.”
xxi
Chapter 1 of the report provides an overview of the study. Chapter 2
provides a review of the agreements’ negotiations and commitments, and of the
historical settings in which the agreements were negotiated. Chapter 3 provides
a review of developments in the U.S. economy since 1974, the year Congress
first authorized fast-track authority. In chapters 4-8, a variety of analytical
techniques are used to assess the economic impact of the trade agreements.
Information in these chapters can be brought to bear on eight questions of
interest to trade policy makers:
S
What complicates measurement of the economic impact of trade
agreements?
S
How large were the relative and absolute economic impacts of the
agreements?
S
To what degree are trade policy changes responsible for observed
changes in the level and composition of U.S. trade?
S
How has increased trade affected the distribution of wages in the
United States?
S
How has increased trade affected economic growth and measures of
firm productivity?
S
How have the trade agreements affected specific industries?
S
What are interested party views about the effects of the agreements?
S
What are the open questions and areas of ongoing research?
What complicates measurement of the economic impact of trade
agreements?
Three important analytical challenges complicate measurement of the
impact of trade agreements. First, the agreements considered in this report
contain a number of policy changes that are difficult to measure. Most
quantitative exercises focus on the role of tariff changes and changes in
measurable nontariff barriers. Such studies do not capture the often significant
effects of changes in unquantified non-tariff barriers, services and other
non-quantifiable measures. Second, a number of technological, economic, and
political changes have contributed to trade growth in the years since the
negotiation each of these agreements was first authorized. Isolating the effect
of trade agreements on trade growth in the midst of these other changes is
difficult. Third, changes in the domestic economy that are sometimes attributed
to trade growth may have other causes, such as changes in domestic economic
policy or technological innovation. Any assessment of the effect of trade
agreements must acknowledge the aforementioned difficulties.
xxii
An important feature of the trade agreements considered in this report is
that they obliged the signatories to undertake significant policy changes in
addition to tariff reduction. Nontariff policy changes included the removal of
quantitative restrictions on trade, harmonization of customs procedures,
agreements on scientific standards and other technical barriers to trade,
disciplines on future trade policy, agreements on domestic and trade-related
policies such as subsidies and government procurement, and agreements on
trade-related investment measures and trade-related intellectual property rights.
Measurement difficulties preclude quantitative assessments of the
economywide impact of these policies. Consequently, most quantitative
exercises will likely understate the economic effects of the five agreements.
Chapter 5 identifies the sectors in which unquantified policy changes were
important.
The agreements were not the only source of growing U.S. trade. A number
of countries, including China, India, and Mexico, undertook significant
unilateral economic reforms that led to greater participation in world markets.
New transportation and communication technologies also facilitated trade.
Growing incomes in the United States and in the rest of the world were another
source of trade growth.
Growing trade was not the only source of significant U.S. economic
change, and it is difficult to isolate the effects of trade growth from domestic
changes. Chapter 3 reviews other significant changes to the U.S. economy, and
discusses their relevance for measuring the effects of trade policy changes.
Technological innovation, U.S. policy changes in other arenas, and
demographic changes are among the more significant issues that masked the
effects of trade policy changes.
How large were the relative and absolute economic impacts of the
agreements?
Chapter 7 reports the results of a numeric simulation that imposes
pre-Tokyo Round trade barriers on an economic model of the United States.
The model provides a consistent framework for evaluating the economy-wide
effects of the measurable trade policy changes associated with the respective
agreements. The primary value of the simulation is that it provides a succinct
description of the agreements’ relative economic impact; the agreements are
measured by their effect on economic welfare.4
Figure ES-1 shows the incremental impact in 2001 of reimposing the
quantifiable trade restrictions (tariffs and quantified non-tariff barriers only)
eliminated by each of the trade agreements. The multilateral
4 Welfare is a comprehensive measure that represents the income loss to U.S.
citizens that would be equivalent to the economic impact of removing the agreements.
Welfare is a net measure that includes all the positive and negative impacts of trade
policy changes. This is not to say that specific measures presented are precise.
Including other features in the model, such as scale economies or adjustment frictions,
would affect the estimated welfare impact of removing the agreements.
xxiii
Figure ES-1
Simulated marginal welfare impact of removing agreements in 20011
0
Billions of 1996 dollars
-5
- 10
- 15
- 20
- 25
Uruguay
NAFTA2
CFTA
U.S.-- Israel FTA
Tokyo
1 Displays the incremental impact in 2001 of reimposing the quantifiable trade
restrictions eliminated by each of the agreements. The policies are imposed on a numeric model of the U.S. economy.
2 Considers only the effect of Mexican policy changes and U.S. policy changes
with respect to Mexico.
Source: USITC.
agreements–the Tokyo and Uruguay Round Agreements–likely had
substantially larger impacts on the U.S. economy than the three preferential
agreements. Because trade policy changes in the multilateral agreements
apply to a larger share of U.S. trade and to a large number of trading
partners, the measured economy-wide effects are larger than the effects of the
preferential agreements. Similarly, the effects of NAFTA and CFTA are much
larger than the effects of the U.S.-Israel FTA because U.S. trade with Mexico
and Canada is much larger than trade with Israel. One important reason that
the measured effects of NAFTA exceed those of CFTA is that Mexican tariff
cuts in NAFTA were larger than the Canadian cuts under CFTA. The
Uruguay Round Agreements and NAFTA have not yet been fully
xxiv
implemented, so the economic impact of these agreements is likely to be
somewhat larger in the future.
Although model results are best understood as measures of the agreements’
relative impacts, they may also be used as estimates of the economic effects of
the quantifiable policy changes in the agreements. The model relies on
particular assumptions about underlying economic behavior in the United
States economy. The assumptions in the model used here are conventional, and
the results are best understood as a conservative estimate of the effects of the
agreements. Under the assumptions of the model, U.S. economic welfare in
2001 would have been $56 billion5 lower (approximately 0.6 percent of U.S.
gross domestic product (GDP)) if the measurable trade barriers (e.g., tariffs)
eliminated by the trade agreements were reimposed.
To what degree are trade policy changes responsible for observed
changes in the level and composition of U.S. trade?
Between 1974 and 2001, the value of U.S. exports and imports grew from
$0.5 trillion to $2.5 trillion. Trade agreements were one of many factors that
contributed to trade growth. Estimates of the direct effect of trade policy
changes on trade growth attribute 15 to 25 percent of the historical increase in
U.S. trade across all sectors to tariff reductions. These estimates encompass
econometric estimates from the literature6 and the Commission’s simulation
results in chapter 7. Chapter 8 notes that trade agreements may also increase
the variety of traded goods as well as the volume of trade.
Other methods that attempt to assess indirect channels through which trade
agreements may affect trade yield higher estimates of the share of historical
trade growth explained directly or indirectly by liberalization. These indirect
channels include outsourcing7 and scale economies in shipping.8 As discussed
in chapter 6, trade agreements may also increase trade by reducing uncertainty
about future trade policy. Though widely recognized, the role of reduced
uncertainty about future trade policy in increased trade is difficult to quantify
directly.
Preferential trading arrangements appear to have had a significant impact
on the pattern of U.S. trade. Chapter 6 finds that the tariff cuts associated with
5
All dollar figures are inflation adjusted, and reported in 1996 dollars.
Scott L. Baier and Jeffrey H. Bergstrand, 2001, “The Growth in World Trade:
Tariffs, Transport Costs, and Income Similarity”, Journal of International Economics,
vol. 53, pp 1-27.
7 Kei-Mu Yi, “Can Vertical Specialization Explain the Growth in World Trade?”
forthcoming in Journal of Political Economy. Draft available at
http://www.newyorkfed.org/rmaghome/economist/yi/pubs.html, downloaded March 20,
2003. Using a model that links tariff reductions and foreign outsourcing, Yi estimates
that as much as 53 percent of historic U.S. trade growth may be due to tariff reductions.
8 David Hummels and Alexandre Skiba, “A Virtuous Circle? Regional Tariff
Liberalization and Scale Economies in Transport,” 2002, forthcoming in FTAA and
Beyond: Prospects for Integration in the Americas, Inter-American Development Bank.
6
xxv
NAFTA explained approximately 1/3 of the growth in the Mexican share of
U.S. imports from 1990-2001. Chapter 6 also finds that the average U.S.
share of Mexican imports also rose as a result of NAFTA, but the effects of
NAFTA were offset by the devaluation of the peso against the dollar.
How has increased trade affected the distribution of wages in the
United States?
A widely noted phenomenon of the last two decades has been the
increasing gap between wages paid to college-educated workers and wages
paid to workers with a high school diploma. Evidence reviewed in chapter 3
indicates that workers with a college degree earned 57 percent more than high
school graduates in 1975 and 111 percent more in 1999. The wage distribution
across other measures of skill also increased over the period. In manufacturing,
earnings of nonproduction workers were 53 percent higher than earnings of
production workers in 1977 and 78 percent higher in 2000.
A large literature based on a standard trade modeling framework indicates
that approximately 10 to 20 percent of the growth in the skilled wage premium
over the last two decades can be attributed to international trade. These studies
usually attribute most of the growing skill premium to technological change.
Other, more controversial estimates attribute a larger share of the growth in the
skill premium to international trade. One innovative contribution estimates that
40 percent of the growth in the wage premium may be attributable to a
combination of international trade and foreign outsourcing.9
Most studies of the wage distribution evaluate the impact of increased
trade, not the effects of trade policy changes. Other sources of trade growth,
particularly developing country entry into world markets, may have been more
important than trade policy changes in increasing the wage gap between skilled
and unskilled workers. One study reviewed in chapter 4 finds no statistically
significant effects of tariff reductions or falling transportation costs on wage
inequality.10 In this study, falling prices of labor intensive imports appear to
have been much more important than tariff reductions.
How has increased trade affected economic growth and measures
of firm productivity?
Productivity growth is a key determinant of a country’s long-term standard
of living. As chapter 3 notes, inflation-adjusted U.S. per capita GDP rose from
$19,163 to $32,352 between 1974 and 2001. During that period, private sector
labor productivity rose by 69 percent. Labor productivity in manufacturing was
up 132 percent over the same period. Chapter 3 reviews a number of
9 Robert C. Feenstra and Gordon H. Hanson, “The Impact of Outsourcing and High
Technology Capital on Wages: Estimates for the United States, 1979-1990,” Quarterly
Journal of Economics, vol. 114, No. 3, August 1999, pp. 907-940.
10 Jonathan E. Haskel and Matthew J. Slaughter, “Have Falling Tariffs and
Transportation Costs Raised U.S. Wage Inequality?” Review of International Economics,
forthcoming September 2003.
xxvi
developments in the U.S. economy that might have contributed to labor
productivity growth, including technological change, an increasingly educated
work force, and higher rates of capital investment. Chapter 4 reviews
literature investigating the possibility that increased trade and/or reduction in
trade barriers contribute to productivity growth.
Cross-country studies of trade and economic growth ask if countries with
lower trade barriers or more trade experience faster economic growth than
countries with high trade barriers or less trade. In 1997, the Commission
determined that the cross-country evidence linking trade and economic growth
was mixed.11 Subsequent studies have found positive links between more open
trade policies and economic growth.12 Critics argue that the link between trade
policy and economic growth is still unproven.13
A nascent body of literature uses firm level data to consider the effects of
trade and trade policy changes on firm behavior. Evidence from U.S. data
suggests that more productive firms tend to become exporters. Evidence that
becoming an exporter causes a firm to become more productive is mixed. The
available evidence suggests that firms become more productive in the years
prior to exporting, and in the initial year of exporting. There is little conclusive
evidence that becoming an exporter raises a firm’s long-term rate of
productivity growth.14 A subsequent study of U.S. data finds that industries
with larger reductions in trade costs (tariffs and transportation costs)
experienced faster productivity growth.15 Studies using developing country
data have found that industries competing most directly with imports
experience the largest productivity increases after liberalization,16 but there are
not yet any studies of U.S. firm level data on this topic.
11 U.S. International Trade Commission, The Dynamic Effects of Trade
Liberalization: an Empirical Analysis, Publication No. 3069, 1997.
12 Richard E. Baldwin and Elena Seghezza, “Testing for Trade-Induced
Investment-Led Growth,” National Bureau of Economic Research Working Paper No.
5416, 1996.
13 Francisco Rodriguez and Dani Rodrik, “Trade Policy and Economic Growth: A
Skeptic’s Guide to the Cross-National Evidence,” National Bureau of Economic
Research Working Paper No. 7081, 1999.
14 Andrew Bernard and J. Bradford Jensen, “Exceptional Exporter Performance:
Cause, Effects, or Both?” Journal of International Economics, vol. 47, 1999, pp. 1-25.
15 Andrew Bernard, J. Bradford Jensen, and Peter K. Schott, “Falling Trade Costs,
Heterogenous Firms and Industry Dynamics,” National Bureau of Economic Research
Working Paper No. 9639, April 2003.
16 See, for example, Nina Pavcnik, “Trade Liberalization, Exit and Productivity
Improvements: Evidence from Chilean Plants,” Review of Economic Studies, vol. 69,
2002, pp. 245-76.
xxvii
How have the trade agreements affected specific industries?
Economic theory suggests that increased trade changes the composition of
domestic output. All else equal, trade agreements should cause exporting
sectors’ share of output to increase, and import-competing sectors’ share of
output to decrease. Changes in industry shares of domestic output also have
causes unrelated to trade agreements. The report takes two approaches to
isolating the effects of trade policy on industry level output.
Chapter 5 examines the historical experiences of 10 sectors of the
economy. Most sectors experienced considerable changes not directly related to
trade policy, and the effects of the trade agreements on sectoral output were
generally considered to be small, relative to other factors. Several sectors
witnessed substantial growth in multistage international production processes,
though it is unclear how important the agreements have been in fostering these
changes. Two sectors–textiles and apparel, and metal and metal products–were
most notably affected by increased competition from international markets,
though the agreements were not the only reason for increased import
competition.
Econometric analysis in chapter 6 identifies ex post statistical relationships
between tariff changes in NAFTA and sectoral trade between the United States
and Mexico. The study finds that the Mexican share of U.S. imports went up
most in those sectors in which the U.S. tariff preference for Mexican goods
was largest. Estimates suggest that a 1 percent change in the U.S. tariff
preference given Mexican imports under NAFTA led to a 4.5 percent increase
in Mexico’s share of U.S. imports. The effect was even stronger in some
sectors, such as textiles and apparel, where larger preferences were given and
where non-tariff barriers were also removed. The econometric study also finds
that the U.S. share of Mexican imports rose most in those sectors where the
Mexican tariff preference toward U.S. goods was largest, specifically footwear,
miscellaneous manufactures, and textiles and apparel.
What are interested party views about the effects of the
agreements?
The Commission received input from 22 interested parties on the effects of
the trade agreements in question through statements made in a public hearing
and submissions of written comments.17 Interested parties included labor
unions, industry associations, and an employee of a public policy research
organization. Many offered specific views about the contents of specific
agreements. Most attention was paid to the most recent agreements – the
Uruguay Round Agreements and NAFTA.
The interested parties that viewed the effects of the trade agreements
favorably included associations of exporting firms, firms in industries with
internationally integrated production processes, organizations supporting
stronger international protection of intellectual property rights, and the
17
xxviii
The views of interested parties are summarized in appendix F.
representative of a policy research organization. Supporters of the agreements
argued that the agreements had allowed them greater access to foreign
markets, improved U.S. competitiveness, and protected intellectual property
developed in the United States. Industry associations supporting the
agreements
included
representatives
of
electrical
manufacturers,
research-based pharmaceutical manufacturers, and almond growers, as well as
a representative of manufacturers as a whole. Some groups, including dairy
producers, ranchers and cattlemen, forest and paper products, the scheduled
airline industry and generic pharmaceuticals producers, expressed support for
particular agreements, and qualified support, if any, for other agreements. In
some cases, industry associations that generally supported the agreements
argued that one agreement or another had not sufficiently reduced foreign
country trade barriers.
Those that viewed the effects of the agreements negatively included a
federation of labor unions and industry associations from import-competing
sectors. Industry associations associated with the citrus, tomato, tuna, steel,
ceramic tile, brushmaking, restaurant china, and non-woven fabric sectors
stated that the market share of domestic producers had fallen owing to
competition with low-priced imports. The representative of organized labor
stated that the agreements had contributed to job loss, especially in
manufacturing, as well as lower wages for its workers. An association of
copper producers noted that low-priced copper imports had been detrimental to
the domestic copper industry, but that the agreements had also lowered the cost
of industry inputs. Other factors, including U.S. environmental regulation and
antitrust law, were considered to have had more significant effects on the
copper industry than the trade agreements.
What are the open questions and areas of ongoing research?
Difficulties in quantifying non-tariff measures complicate efforts to
measure the impact of the agreements. Efforts to quantify non-tariff measures
should be a priority, as more recent trade agreements have obliged the parties
to undertake significant policy changes of the kind that are difficult to quantify.
Ongoing research at the Commission is attempting to quantify specific
nontariff measures.
The relationship between trade agreements and the growth of foreign
outsourcing has received increasing attention in public policy discussions and
in academic research. Theoretic models that allow tariff reductions to induce
foreign outsourcing of low-skilled activities attribute greater increases in
welfare and productivity growth to tariff reductions than do standard
international trade models. These models also suggest that foreign outsourcing
magnifies the effect of trade agreements on earnings inequality. The relative
importance of trade policy and other factors in facilitating foreign outsourcing
is still unclear.
Relatively little research has explored the effects on the United States of
unilateral economic reforms in developing countries. Substantial reforms in
xxix
countries that became significant U.S. trading partners are a plausible
alternative explanation for many of the trade-related phenomena observed in
recent years. A better understanding of how these reforms affected both the
United States and these countries is needed. Recent research indicates that
industries competing most directly with imports from poor countries
experienced slower employment growth and higher rates of plant closure than
other industries.18
Studies of firm-level data are relatively new in the international trade
literature. Most studies use industry-level data to investigate the effects of
trade, and overlook important differences in how firms within an industry
respond to economic change. A number of studies reviewed in chapter 4 use
firm-level data to measure the effects of trade policy changes. Many of these
studies use firm-level data from developing countries to identify effects of
trade policy on firm behavior. While some research linking trade to U.S.
firm-level data has been done, further research on U.S. firm-level responses to
trade policy changes would be useful.
18 Andrew Bernard, J. Bradford Jensen, and Peter K. Schott, “Survival of the Best
Fit: Exposure to Low-Wage Countries and the (Uneven) Growth of U.S. Manufacturing
Plants,” April 2003, manuscript. Available at internet address
http://www.som.yale.edu/Faculty/pks4/files/research/papers/emptvs_66.pdf.
xxx
CHAPTER 1:
Introduction
This report has been prepared in response to a requirement of the Trade
Act of 2002 (19 U.S.C. 3811), enacted on August 6, 2002.1 Section 2111 of
that Act requires the International Trade Commission to report to the Senate
Finance Committee and the House Ways and Means Committee regarding the
economic impact on the United States of the following trade agreements: the
Tokyo Round of Multilateral Trade Negotiations, the United States-Israel Free
Trade Agreement, the United States-Canada Free Trade Agreement, the North
American Free Trade Agreement, and the Uruguay Round Agreements.
Scope of the Study
As posed in the legislation, the issue to be addressed here is both simple
and broad–to describe the economic impact on the United States of five major
trade agreements implemented over the past 25 years. The five agreements,
which include the last two major multilateral agreements negotiated under the
General Agreement on Tariffs and Trade (GATT) as well as three preferential
trade agreements, account for much of the trade liberalization that has occurred
over the past quarter century.2 An analysis of the effects of the policies
implemented under the agreements is nearly equivalent to an analysis of the
effects of trade liberalization in general on the United States over the period. In
some cases the discussion in this report is framed in terms of the effects of
trade agreements in general rather than the effects of the five agreements
specified in section 2111 of the Trade Act of 2002. To the extent possible,
however, the analysis is restricted to the effects of the five agreements. To
assess the economic impact from the five trade agreements is a challenging
task. It requires the isolation of the impact of trade agreements from those
caused by an array of other trade policy events, changes in exchange rates,
international conflicts, and demographic and technical change. In addition,
most of the five agreements themselves had long and overlapping
implementation phase-in periods (especially NAFTA and the Uruguay Round),
further complicating the problem of observing their effects individually. To
provide a reasonably complete and comprehensive description of the economic
impact of these agreements requires the use of a variety of analytical tools.
1
Pub. L. 107-210, 116 Stat. 933.
The major trade liberalization in this period that was not directly a part of one of
the five agreements was the accession of China to the World Trade Organization (WTO),
bringing that country within the scope of the world trading system.
2
1
The agreements implement changes in tariffs, quotas, investment policies,
and other policies that have had direct effects on imports and exports, as well
as indirect effects on production and productivity, employment and earnings,
and measures of general economic welfare. At some points in the current
analysis, the Commission focuses on ways in which trade policy, as reflected in
the agreements, affects trade directly through influencing the international flow
of goods and services. By changing tariffs, quotas, and other policy
instruments, the agreements generally reduce the relative prices at which
products are traded internationally, thereby directly increasing trade flows.
These changes then influence the output of these products, the location of their
production and consumption, and the productivity and earnings of labor and
capital engaged in that production. Indirect effects of trade policy are
analytically much more difficult to quantify. At many points in the analysis
contained in this report, the focus shifts from an emphasis on the effects of
trade policy on trade flows to an emphasis on the effects of trade flows on
these other important variables.
Approach of the Study
The Commission has employed multiple approaches to assess the effects on
the U.S. economy of trade policy as implemented through the five specified
trade agreements signed since 1979. As the primary approach, the Commission
has relied on a review of literature to provide an assessment of the direct
effects of trade agreements and trade policy on trade. An assessment through
the economic literature is central to the analytical content of this report. For an
additional perspective, industry research provides a basis to analyze effects on
trade for specific industry sectors in the U.S. economy. The industry research
describes trends in trade flows, industry output and employment, and
consumption since 1978 and ties this description to an assessment of the effects
of the trade agreements on the specific industries. Following the industry
analysis, the Commission employs econometric and simulation models to
examine specific policy-trade linkages. The first econometric analysis, in
chapter 6, presents evidence on how a specific policy agreement (NAFTA)
affects U.S. trade with a trading partner that receives preferential treatment
under that agreement (Mexico). The simulation model in chapter 7 provides,
among other things, a model of the effects of trade liberalization agreements on
trade flows, and the indirect effects on output and the allocation of capital and
labor to production in the aggregate. The model is unique in its use of a single
methodologically consistent framework and an original database to look at the
effects of all five agreements. Finally, the analysis in chapter 8 examines the
ways in which tariff reductions have induced growth in the number of U.S.
import sources for each product.
A public hearing was held in connection with this investigation on January
14, 2003. Interested parties presented their views on the subject trade
agreements at this hearing and in written statements submitted in response to
2
announcements that appeared in the Federal Register. A summary of these
views is given in appendix F to this report.
Organization of the Report
Chapter 2 presents historical background on the five trade agreements
themselves, with the principal issues involved in their negotiation and
implementation, which serves to define the policy instruments used to make
changes to trade flows and, ultimately, to the domestic economy. Broadly
speaking, these policy instruments include tariff reductions and liberalization of
nontariff measures, as well as subsidiary issues such as the treatment of
customs procedures, phytosanitary restrictions, and intellectual property
protections.
The Tokyo Round was the first round of multilateral trade negotiations to
move beyond tariff reductions as a major part of the agreement.3 A major
objective of the round was to address various nontariff measures of trade
protection that had become relatively (and absolutely) more important barriers
to trade in the wake of earlier tariff reductions. The Trade Act of 1974, which
included negotiating authority and fast-track procedures, was passed to address
these concerns. Fast-track authority lasted until 1980 under this legislation and
was renewed in 1979 for a further 8 years,4 and was renewed again in the
Omnibus Trade and Competitiveness Act of 1988 signed by President Reagan
to permit negotiation of the Uruguay Round of GATT.5 The authority for fast
track was set to expire in 1993, but legislation extended it through April 16,
1994, to allow for negotiation not only of the Uruguay Round but also of the
North American Free Trade Agreement. Fast-track authority expired on the set
date in April 1994 and was not reauthorized until the passage of the Trade Act
of 2002, at which point it was renamed Trade Promotion Authority.
Chapter 3 provides background on the development of the U.S. economy
over the past 25 years, and chapter 5 extends into an analysis of the
development of industry sectors in the economy. Where chapter 2 reviews trade
policy instruments of economic change, chapter 3 looks at some of the objects
of this change–trends in gross domestic product (GDP) growth, employment,
capital growth, and productivity. The chapter also describes other phenomena
that have developed since 1979, including population growth and technological
progress, phenomena that account for much of the growth in trade, output, and
employment.
3 See chapter 2 of this report for a more complete discussion of the history of U.S.
trade agreements.
4 Trade Agreements Act of 1979, Pub. L. No. 96-39, 93 Stat. 144.
5 Pub. L. No. 100-148.
3
Trade has grown enormously over the decades since implementation of the
Tokyo Round. Trade in goods and services, calculated as imports plus exports
and measured in constant 1996 dollars, has grown from $0.5 trillion in 1974 to
$2.5 trillion in 2001. Figure 1-1 provides an index of the relative growth of
trade and GDP since 1978, the year before the signing of the Tokyo Round
Agreements. In that time, GDP has approximately doubled, while trade has
grown by a factor of four. The principal argument of chapter 3 is that much, or
most, of the growth of the economy is owing to factors other than trade, and
furthermore that growth in trade itself can be attributed to factors other than
trade agreements and trade policy.
Chapter 4 of this report is a survey of economic literature addressing
effects of trade and trade policy on economic outcomes. Because the types of
effects are so varied, and the impacts of trade policy are in many cases so
difficult to identify, the survey was prepared as an attempt to ascertain the
findings of the economics profession at large and to provide these findings as
the key part of the overall answers to the questions addressed in the current
report.
The work reported in chapter 4 follows a number of threads because trade
policy over time has proceeded in a number of different directions, having
included bilateral and multilateral agreements, an increasing focus on nontariff
measures, agricultural trade harmonization, and agreements on investment
measures and services trade. Trade growth also has been far from uniform.
Trade with some countries (such as Mexico and China) has grown much more
rapidly than with others, and under very different circumstances. In particular,
the tremendous growth in trade with China has taken place outside the scope of
the five trade agreements that are the focus of this report. Trade in different
products (textiles and apparel, electronics, services) has likewise grown at very
different rates. In combination with trends in technology, productivity, and
demography, both in the United States and the rest of the world, these trade
developments contribute to changes in employment and the distribution of
earnings and to industrial restructuring. All of these linkages need to be
explored to gain an understanding of the effects of trade policy on the economy
of the United States. In particular, much of the story on income and
employment redistribution, industrial restructuring, and the realization and
exploitation of productivity growth can be told at the level of specific industrial
sectors.
Chapter 5 provides this perspective, examining factors that have affected
output, employment, and productivity trends in all U.S. industry sectors during
1978-2001. These factors include domestic and foreign competitive conditions,
macroeconomic factors, technological innovation, changes in industry structure,
and government regulations. It describes the effect of the five trade agreements
4
Figure 1-1
Benchmark quantity indices for U.S. real income and trade,
1978-2001
5.0
4.5
Index (1978 equals one)
4.0
GDP
Imports
Exports
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Edward J. Balistreri and Alan K. Fox, 2003, “TSCAPE:
A Time Series of Consistent Accounts for Policy Evaluation,”
USITC Working Paper, 2003-05-A (May).
on the sectors.6 The value of exports has grown fastest in the services,
machinery and equipment, transportation equipment, miscellaneous
manufactures, and chemicals sectors, while the value of imports has grown
fastest in textiles and apparel, machinery and equipment, chemicals,
miscellaneous manufactures, and services sectors. A notable development has
been the growth of globally integrated manufacturing processes in sectors
such as machinery and equipment, transportation equipment, and chemicals.
Global integration has spurred two-way trade within these sectors.
6
For the purposes of this investigation, all U.S. industries have been grouped into 10
sectors: Agriculture; chemicals and allied products; energy and fuels; forest and fishery
products; machinery and electronics; mineral and metal products; miscellaneous
products; services; textiles and apparel; and transportation equipment.
5
The literature review in chapter 4 reveals a number of areas in which
understanding of the effects of trade policy is incomplete. The remaining
chapters of the report attempt to fill some of the remaining gaps in that
understanding. Chapter 6 contains original empirical analysis of the extent to
which preferential trade policy changes, such as those implemented in NAFTA
and in the U.S.-Israel and U.S.-Canada Free Trade Agreements, actually
increase the import market shares of the beneficiaries to the agreement, which
is a question central to research on the responsiveness of bilateral trade flows
to trade policy changes.
Chapter 7 describes the results of using an original model and data base
consistent with standard economic and trade theory, applied uniformly to the
five agreements, to simulate the effects of the trade agreements on the U.S.
economy. The model is methodologically similar to general equilibrium models
that have frequently been used to simulate effects of proposed trade
agreements. In the present context the model provides analyses of the
individual and cumulative effects of the agreements.
Finally, chapter 8 considers how liberalization of trade policy increases the
variety of trade that takes place, where “variety” can mean the import of traded
products from new sources, or the import of new or previously untraded
products. Much empirical trade analysis relies on an assumed ability to
distinguish goods, especially goods from different trading partners, in the
depiction of trade growth and trade shifts, but most analysis is unable to
address the question of how such goods enter the trade system. Failure to
account for such new trade can mean that estimates of the effects of trade
policy are otherwise understated.
6
CHAPTER 2:
Negotiation of Trade Agreements
Under Trade Promotion
Authority
Legislation and Agreements Approved
Under Trade Promotion Authority
Overview
Congress delegates a portion of its constitutional charge to formulate and
administer trade policy to the President through trade agreement authority.1
This authority permits the President to negotiate and enter into trade
agreements, whether bilateral or multilateral. Whereas the delegating authority
to negotiate tariff agreements has proved straightforward, Congress devised a
different means to delegate authority for trade agreements involving nontariff
barriers to assure U.S. trading partners that the substantial changes to U.S. laws
and administrative practices expected from any nontariff agreement would in
fact come to be implemented as negotiated.
Under the Trade Act of 1974, the President was given authority for the first
time to negotiate trade agreements involving nontariff barriers. Congress
further agreed to expedited approval procedures to approve or disapprove–but
not to amend–bills submitted to implement the nontariff agreements negotiated.
This process was known informally as “fast track authority.” Since then, the
President has negotiated five agreements under this authority: the 1979 Tokyo
Round Agreements, the 1985 U.S.-Israel Free Trade Agreement, the 1988
U.S.-Canada Free Trade Agreement, the 1993 North American Free Trade
Agreement (NAFTA), and the 1994 Uruguay Round Agreements. Congress has
subsequently passed the implementing bills submitted to enter these nontariff
agreements into U.S. law through expedited approval procedures (See figure
2-1 for a timeline of events related to fast-track negotiating authority).
1
Congress also delegates some of its authority, although to a lesser extent, through
certain statutes establishing tariff preference programs.
7
Figure 2-1
Timeline of events related to fast-track negotiating authority, 1934-2002
1934
June 12
The Reciprocal Trade Agreements Act of 1934 is signed
into law by President Roosevelt. It authorizes the
President to negotiate trade agreements with other
governments and to implement changes resulting from
these tariff negotiations without further Congressional
authorization.
1962
October 11
The Trade Expansion Act of 1962 is signed into U.S. law
by President Kennedy. The Act provides the negotiating
authority for the 1963-67 Kennedy Round of GATT
multilateral trade negotiations (MTN). Results of the
Kennedy Round exemplify the cumulative success of
multilateral tariff reductions.
1973
September 12 to 14
1975
January 3
1979
January 4
April 12
8
President Nixon proposes a trade bill to authorize U.S.
participation in the next round of GATT trade
negotiations.
The Tokyo Declaration opens the 1973-79 GATT round
of multilateral trade negotiations known as the Tokyo
Round. The Tokyo Round is the first to include
negotiations for nontariff trade barriers as well as tariff
barriers.
The Trade Act of 1974 is signed into law by President
Ford. The Act provides negotiating authority for U.S.
participation in the Tokyo Round for a 5-year period
through Jan. 2, 1980. The Act authorizes the President
to enter into trade agreements on nontariff barriers,
which the Congress will consider under special
expedited approval procedures, so-called “fast-track”
implementing procedures, that prohibit amendments to
the implementing bill submitted by the President to enact
the negotiated trade agreement. The Act also authorizes
the U.S. Generalized System of Preferences (GSP).
President Carter notifies the Congress of his intention to
enter into the multilateral trade agreements concluded
by the Tokyo Round.
Negotiators initial the draft Tokyo Round agreements.
Figure 2-1—Continued
Timeline of events related to fast track negotiating authority, 1934-2002
June 19
President Carter submits implementing legislation to the
Congress to enact the Tokyo Round Agreements under
fast-track approval procedures in accordance with the
1974 Trade Act.
June 30
The Tokyo Round Agreements are signed by
participating governments, formally concluding the
1973-79 Tokyo Round of GATT multilateral trade
negotiations. Most of the agreements enter into force on
Jan. 1, 1980; a few on Jan. 1, 1981.
July 26
The Trade Agreements Act of 1979 is signed into law by
President Carter. The Act implements the Tokyo Round
Agreements into U.S. law. The 1979 Trade Act also
extends negotiating authority under fast-track
implementing procedures through Jan. 2, 1988.
1980
January 1
The Tokyo Round Agreements enter into force. The
agreements on customs valuation and government
procurement are exceptions, entering into force on Jan.
1, 1981.
1982
November 24 to 29
The 38th session of the GATT Contracting Parties, at
ministerial level for the first time in nearly a decade, fails
to address in unified fashion the growing protectionist
trade pressures stemming from a protracted downturn in
the world economy.
1983
November
President Reagan and Israeli Prime Minister Shamir
agree to bilateral negotiations on a free trade area (FTA)
between the United States and Israel.
1984
January 17
September
October 30
Formal negotiations begin between the United States
and Israel on a free trade area agreement.
The new Canadian government of Prime Minister
Mulroney opens a review of ways to promote freer trade
with the United States.
The Trade and Tariff Act of 1984 is signed into law by
President Reagan. The 1984 Trade Act extends the
President’s authority to grant trade preferences,
negotiate bilateral free trade agreements, and enforce
export restraint agreements such as on steel.
9
Figure 2-1—Continued
Timeline of events related to fast track negotiating authority, 1934-2002
1985
April 22
The United States-Israel Free Trade Area Agreement is
signed. The agreement eliminates tariff and nontariff
barriers on most products traded between Israel and the
United States by Jan. 1, 1995.
April 29
President Reagan submits implementing legislation to
the Congress to enact the United States-Israel Free
Trade Area Agreement.
June 11
The United States-Israel Free Trade Area
Implementation Act of 1985 is signed by President
Reagan into U.S. law. It is the first bilateral free trade
area agreement negotiated by the U.S. Government.
August 19
The United States-Israel Free Trade Area Agreement
enters into force.
September 26
Canadian Prime Minister Mulroney formally requests
that the United States and Canada open negotiations on
a United States-Canada Free Trade Agreement.
December 10
President Reagan notifies the Congress of his intention
to enter into bilateral negotiations with Canada for a free
trade area.
1986
June 17
Formal negotiations begin on the United States-Canada
Free Trade Agreement.
September 15 to 20
The Punta del Este Declaration opens the 1986-93
GATT round of multilateral trade negotiations known as
the Uruguay Round. Scheduled to conclude within 4
years, the Uruguay Round is the first to extend
negotiations beyond trade in goods to negotiate trade in
services and other issues.
1987
October 3
President Reagan notifies the Congress of his intention
to enter into a bilateral agreement with Canada for a free
trade area.
October 4
Negotiators initial the draft text of the U.S.-Canada FTA.
December 9
Negotiators finalize the text of the U.S.-Canada FTA.
1988
January 1
The Harmonized System Convention enters into force.
The Harmonized Tariff System (HTS) was designed by
the Customs Cooperation Council, a technical body in
Brussels, Belgium that analyzes and helps resolve
customs problems, as a 6-digit “core” system of
nomenclature for customs tariffs, statistical enumeration,
and transport documentation.
January 2
The U.S.-Canada FTA is signed.
July 25
President Reagan submits implementing legislation to
the Congress to enact the U.S.-Canada FTA into law.
10
Figure 2-1—Continued
Timeline of events related to fast track negotiating authority, 1934-2002
August 23
The Omnibus Trade and Competitiveness Act of 1988 is
signed into law to provide negotiating authority and
fast-track implementing procedures for the Uruguay
Round negotiations. The 1988 Trade Act provides tariff
and nontariff negotiating authority to the President
through May 31, 1993. The 1988 Trade Act provides
fast-track implementing procedures through May 31,
1991, with a provision for a 2-year extension through
May 31, 1993.
September 28
President Reagan signs the U.S.-Canada Free Trade
Agreement Implementation Act of 1988 into law.
December 5 to 9
The Midterm Review of Progress in the Uruguay Round
is held in Montreal, Canada.
1989
January 1
The Tariff Schedule of the United States is replaced
with the Harmonized Tariff Schedule of the United
States on January 1, 1989.
January 1
1990
June
September 25
December
1991
February 5
March 1
June 12
December 4
The U.S.-Canada FTA enters into force.
President G.H.W. Bush announces the Enterprise for
the Americas Initiative, later known as the Free Trade
Area of the Americas (FTAA).
President G.H.W. Bush notifies the Congress of his
intention to enter into bilateral negotiations with Mexico
for a free trade area.
The GATT ministerial conference at Brussels, Belgium,
brings the Uruguay Round negotiations near collapse
largely over disagreements about trade in agriculture.
President G.H.W. Bush informs the Congress of his
intention to enter into trilateral negotiations for an
agreement with Canada and Mexico for a free trade
area, the formation of a North American Free Trade
Agreement (NAFTA).
President G.H.W. Bush formally requests the Congress
for renewal of fast-track authority to open the NAFTA
and complete the GATT Uruguay Round negotiations.
Formal negotiations begin in Toronto, Canada, between
Canada, Mexico, and the United States on a NAFTA.
The Andean Trade Preference Act (ATPA) is signed into
U.S. law. The ATPA allows the President to grant certain
unilateral preferential trade benefits to Bolivia, Colombia,
Ecuador, and Peru in the form of reduced-duty or
duty-free treatment for eligible products.
11
Figure 2-1—Continued
Timeline of events related to fast track negotiating authority, 1934-2002
December 20
GATT Director-General Arthur Dunkel issues the draft
Final Act of the Uruguay Round negotiations, commonly
known as the “Dunkel draft.” The draft provides the
basis for negotiations to move forward from the impasse
reached at the 1990 Brussels ministerial conference,
largely over issues involving trade in agriculture.
1992
January 13
The Uruguay Round negotiations are relaunched.
May 13
President G.H.W. Bush announces his intention to
negotiate a bilateral agreement with Chile for a free
trade area, once the NAFTA is concluded. Such an
agreement would be the first under the FTAA initiative.
August 12
Negotiators initial the draft text for a NAFTA, 14 months
after they began formal negotiations.
September 18
President G.H.W. Bush notifies the Congress of his
intent to enter into the NAFTA with Canada and Mexico.
December 17
The Governments of Canada, Mexico, and the United
States of America sign the NAFTA.
1993
April 27
President Clinton formally requests the Congress to
extend negotiating authority and fast-track implementing
procedures for 120 days to conclude the Uruguay
Round negotiations.
May 31
Negotiating authority and fast-track approval procedures
for implementing legislation expire under the 1988 Trade
Act.
July 2
Negotiating authority and fast-track approval procedures
are amended to extend the time limit from May 31, 1993
to April 16, 1994 in order to complete the Uruguay
Round negotiations. The extension requires the
President to notify the Congress of his intention to enter
into a trade agreement 120 days in advance of doing so.
This provision effectively makes Dec. 15, 1993 the
target date for conclusion of the Uruguay Round.
November 3
President Clinton submits implementing legislation to the
Congress to enact the NAFTA under fast-track approval
procedures.
November 17
The U.S. House of Representatives approves the
NAFTA legislation.
November 20
The U.S. Senate approves the NAFTA legislation.
November 22
Mexico ratifies the NAFTA.
December 8
President Clinton signs the North American Free Trade
Agreement Implementation Act into U.S. law.
December 15
Negotiators initial the draft text for the Uruguay Round
Agreements, concluding the 1986-93 Uruguay Round
after 7 years of negotiations.
December 30
Canada proclaims the NAFTA legislation.
12
Figure 2-1—Continued
Timeline of events related to fast track negotiating authority, 1934-2002
1994
January 1
The NAFTA enters into force.
April 15
The Uruguay Round Agreements are signed by
participating governments at Marrakesh, Morocco,
formally concluding the 1986-93 Uruguay Round. The
agreements enter into force on Jan. 1, 1995. The
Uruguay Round was the first MTN to extend
international trade disciplines beyond trade in goods, to
trade in services and intellectual property rights. The
Uruguay Round Agreements also established the World
Trade Organization (WTO) to help carry out the Uruguay
Round Agreements.
September 27
President Clinton submits implementing legislation to the
Congress to enact the Uruguay Round Agreements
under fast-track approval procedure.
December 8
1995
January 1
June 7
2002
August 6
President Clinton signs the Uruguay Round Agreements
Act of 1994 that implements the Uruguay Round
Agreements into law. In the Act, the administration fails
to win from the Congress new negotiating authority
under fast-track implementing procedures which would
allow for further trade negotiations. This failure arises
largely over disagreement about whether labor
standards and environment issues should be formally
included in trade agreement negotiations.
The Uruguay Round Agreements enter into force; the
WTO is established.
The United States, Canada, and Mexico enter into
plurilateral negotiations with Chile for its accession to
the NAFTA.
The Trade Act of 2002 is signed into U.S. law by
President G.W. Bush. The 2002 Trade Act provides tariff
and nontariff negotiating authority to the President for a
3-year period through May 31, 2005, with provision for a
2-year extension through May 31, 2007. The 2002 Trade
Act also provides fast-track implementing procedures
(now called trade promotion authority).
Source: Compiled by the USITC.
13
Tariff vs. Nontariff Barrier Negotiating Authority
Congress has delegated a part of its authority over international trade to the
President since implementation of the Reciprocal Trade Agreements Act of
1934.2 With this authority, the President can negotiate with foreign
governments to enter into multilateral tariff agreements and–without further
congressional approval–proclaim reductions in U.S. tariff rates, subject to
certain limits.3 This general tariff authority has been a key feature of the first
six rounds of multilateral trade negotiations held since 1947 under the auspices
of the GATT.4
Trade negotiations prior to the Tokyo Round concentrated primarily on
reducing or eliminating tariffs, with relatively little effort or progress made in
reducing nontariff barriers or other trade-distorting measures such as
subsidies.5 To address both tariff and nontariff barriers in the Tokyo Round,
Congress needed to grant additional negotiating authority to the President.
As before, Congress could delegate traditional tariff proclamation authority
at a level sufficient to engage foreign governments in multilateral tariff
negotiations but still retain its constitutional mandate to regulate international
trade matters through limits it placed on tariff reductions, de minimis tariff
elimination, tariff staging, etc. Preparing for the Tokyo Round negotiations,
however, Congress found it problematic to devise a way to delegate authority
to the President to negotiate on nontariff barriers that was sufficiently broad but
which did not abrogate Congress’s constitutional powers over international
trade or ignore these barriers’ impact on the people of the United States.6
Presidential authority to negotiate nontariff barriers
As a solution to granting the President sufficient authority to negotiate
nontariff barriers while still retaining its constitutional role to oversee matters
related to trade, Congress fashioned the trade agreement authority and approval
process found in section 102 of the Trade Act of 19747 to encourage countries
2 Pt. III, Pub. L. 316, 48 Stat. 943. Committee on Ways and Means, U.S. House of
Representatives, Overview and Compilation of U.S. Trade Statutes – 2001 Edition, June
2001, pp. 227-229.
3 Tariff reductions are limited to no more than half of current rates of duty. Tariff
elimination is limited to current rates of duty that are 5 percent ad valorem or less, and
certain staging conditions apply, such as limiting tariff reductions, to no more than 3
percent ad valorem in any one year, among other conditions. Committee on Ways and
Means, Overview, p. 227. Reductions or eliminations beyond these limits requires
Congressional approval.
4 General tariff authority has also been called “tariff proclamation” authority.
5 Committee on Ways and Means, Overview, pp. 228-229.
6 Committee on Finance, U.S. Senate, Trade Reform Act of 1974 -- Report of the
Committee on Finance - United States Senate—Together with Additional Views on H.R.
10710, Rep. No. 93-1298, 93d Cong., 2d Sess., Nov. 26, 1974, pp. 75-76.
7 Pub. L. 93-618, 88 Stat. 1978.
14
to participate in negotiations, anticipating that trade agreements emerging
from nontariff barrier negotiations were likely to involve substantial changes
to U.S. domestic laws.8 Section 102 authority thus delegated power to the
President to negotiate and enter into trade agreements on nontariff barriers
provided that Congress retained the final authority to approve the
implementing legislation for these trade agreements.
Although reserving final approval appeared to fulfill Congress’
constitutional responsibility for overseeing the legislative process for trade
agreements, it did nothing to alleviate foreign governments’ concerns about the
uncertainty of the legislative process for approving such agreements. The
uncertainty of whether Congress would approve an implementing bill for a
nontariff trade agreement without reopening negotiations to amend provisions
that it disliked was seen as a major obstacle to engaging the active participation
of potential trading partners in negotiations.
Congressional fast track implementing procedures
To encourage vigorous negotiations and commitments by foreign
governments, Congress devised a special expedited approval process for
implementing legislation. These fast-track implementing procedures were first
set down in section 151 of the 1974 Trade Act. The key feature of the
fast-track approval process was that amendments were prohibited to the
implementing bill that the President submitted to incorporate the proposed
nontariff trade agreement into U.S. domestic law. As such, the Congress could
only vote to approve or disapprove the legislation–a strict up or down vote. To
ensure that congressional views about the proposed trade agreement and
recommendations about changes to U.S. law or administrative practice were
considered during the negotiations, section 102 included a number of
consultation and notification requirements. These consultations were intended
to resolve problems in advance of formal submission and consideration of
implementing legislation by Congress when the special fast-track implementing
procedures were invoked.9
Past and present trade agreement authority
Section 102 authority under the 1974 Trade Act was granted for a 5-year
period from the date of enactment, that is, from January 3, 1975 through
January 2, 1980. The Trade Agreements Act of 1979 extended section 102
authority for an additional 8-year period, through January 2, 1988. Section 102
authority subsequently was replaced by similar authority under section 1102(b)
8
Committee on Finance, Trade Reform Act of 1974 – Report of the Committee on
Finance, Rep. No. 93-1298, p. 75.
9 Committee on Ways and Means, Overview, pp. 234-235.
15
of the Omnibus Trade and Competitiveness Act of 1988.10 Under this
authority, a trade agreement could be entered into only if it made progress in
meeting the applicable objectives set forth in section 1101 of the 1988 Trade
Act.11
The 1988 Trade Act granted section 1102 authority from the date of its
enactment on August 23, 1988 through May 31, 1991. Section 1102 authority
was extended upon request of the President for 2 years, through May 31, 1993.
The Congress amended section 1102 on July 2, 1993 to extend the negotiating
authority and fast track approval procedures to April 16, 1994, in order to
complete the Uruguay Round of GATT multilateral trade negotiations.12
The authority that lapsed in 1993 remained so until section 2103 of the
Trade Act of 200213 granted authority to the President to negotiate trade
agreements from the date of its enactment on August 6, 2002 through May 31,
2005.14 Provisions in the 2002 Trade Act allow for a 2-year extension of
section 2103 authority, through May 31, 2007.
Regional and Bilateral Trade Agreements
Congress delegated to the President the necessary authority to negotiate
agreements on nontariff barriers in the Tokyo Round through section 101 of the
1974 Trade Act, section 102 authority of the 1974 Trade Act, and other
presidential documents. The expedited approval procedures15 included in
section 151 of the 1974 Trade Act encouraged foreign governments to
negotiate with their best offers, secure in the knowledge that Congress could
not amend provisions separately, but instead had to approve or disapprove the
whole agreement as concluded by the negotiators. The United States enacted
10 Pub. L. 100-418, 102 Stat. 1123. Sec. 1102(a) authority was to enter into
multilateral tariff agreements; sec. 1102(b) authority was to enter in multilateral nontariff
agreements; sec. 1102(c) authority was for bilateral agreements regarding tariff and
nontariff barriers.
11 For further details, see section on the Uruguay Round Agreements.
12 Committee on Ways and Means, Overview, pp. 229-230. Section 1102(c), which
authorized the President to enter into bilateral agreements regarding tariff and nontariff
agreements under the same terms and procedures as applied to multilateral trade
agreements, also expired after May 31, 1993 following a similar 2-year extension
request.
13 Pub. L. 107–210, 116 Stat. 933.
14 Section 2103(b)(3)(A).
15 The expedited congressional approval procedures of sec. 151 of the 1974 Trade
Act became referred to commonly as “fast track” although the 1974 and 1979 Trade Acts
did not use the term. Sec. 1103(b) of the 1988 Trade Act used the term in its title
“Application of Congressional ‘Fast Track’ Procedures to Implementing Bills.” Sec.
2103(b)(3) of the 2002 Trade Act calls the provisions of sec. 151 of the 1974 Trade Act
by the name of “trade authorities procedures.”
16
the Tokyo Round Agreements in the Trade Agreements Act of 1979,16
legislation that also extended the U.S. trade agreements authority until 1988.
Once the Tokyo Round Agreements entered into force in January 1980,
major trading nations sought to open another round of multilateral trade
negotiations, in large part to counteract the world recession that followed the
1973 and 1979 global oil price increases. This effort failed in November 1982,
when world recession, high unemployment, and debt service problems in a
number of major countries, such as Mexico, made many countries reluctant to
agree to further trade concessions.17 It was not until November 1985 that the
GATT Secretariat began to establish a preparatory committee to develop an
agenda and timetable for a new round of multilateral trade negotiations.18
Finally, in September 1986, the ministerial declaration in Punta del Este,
Uruguay, launched the eighth round of multilateral trade talks–the Uruguay
Round of GATT trade negotiations.
The reluctance of other governments in 1982 to engage in multilateral
liberalization shifted the United States’ focus to other trade liberalization
approaches, such as regional and bilateral initiatives, even though multilateral
efforts have typically been the primary thrust of U.S. trade policy.19 By the
start of the Uruguay Round, the United States had already embarked on the
complementary policy of pursuing trade liberalization through regional and
bilateral agreements, with the idea of using them as building blocks toward
future multilateral market opening.20 The first of these was a bilateral free
trade agreement between the United States and Israel in 1985. The second was
a bilateral free trade agreement between the United States and Canada in 1988.
The third, which began as a bilateral free trade agreement between the United
States and Mexico, expanded to become a trilateral free trade agreement
between the United States, Mexico, and Canada in 1993–the North American
Free Trade Agreement or NAFTA. In addition, the U.S. President unveiled in
1990 the Enterprise for the Americas Initiative–a regional trade liberalization
16
Pub. L. 96-30, 93 Stat. 145.
Office of the United States Trade Representative (USTR), Twenty-seventh Annual
Report of the President of the United States on the Trade Agreements Program 1983,
transmitted to the Congress Apr. 10, 1984, p. 53. The GATT ministerial declaration in
November 1982 called for positive steps to fight protectionism, avoid predatory trade
practices, resolve outstanding trade problems, and pursue greater trade liberalization. The
OECD ministerial declaration in May 1983 called for measures to ease trade restraints,
end export subsidies and preferences to nonmarket economies, and promote economic
and trade policies aimed at bolstering world economic recovery. The Group of Seven
major industrialized democracies announced in its summit communique later in May
1983 a commitment to halt protectionism and reverse it by dismantling trade barriers.
USTR, Annual Report 1983, p. 53.
18 Council of Economic Advisors (CEA), Economic Report of the President, 1986
(GPO: Washington DC, 1986), p. 122.
19 CEA, Economic Report of the President, 1991, pp. 252-253.
20 CEA, Economic Report of the President, 1995, pp. 214-219.
17
17
effort still underway in 2003, known more widely today as the Free Trade
Area of the Americas (FTAA). The following discussion reviews the main
elements of the multilateral, plurilateral, and bilateral trade agreements
negotiated under the section 102 authority and section 151 approval
procedures first set down in the 1974 Trade Act.
1979 Tokyo Round Agreements
Setting
The context for the 1973-79 Tokyo Round can be illustrated by
comparison with previous trade rounds. The 1963-67 Kennedy Round
immediately preceding was the most significant and comprehensive multilateral
trade agreement yet reached. Its success was due in large part to the use of a
50-percent cut in tariffs for industrial goods–a tariff cutting formula–as well as
the large number of countries (62) that took part in these negotiations. Overall,
the Kennedy Round resulted in an average tariff reduction for industrial
products of 35 percent, liberalizing trade worth roughly $40 billion.
The very success of multilateral efforts at reducing tariff barriers had the
effect of highlighting the nontariff barriers that remained. Thus, the Tokyo
Round is perhaps most notable for the GATT plurilateral agreements on
nontariff barriers that emerged, the first attempt to address nontariff barriers in
a broad multilateral forum.21 The Tokyo Round also went beyond previous
multilateral negotiations in its treatment of trade in agriculture. As in previous
rounds, the Tokyo Round in its multilateral format focused essentially on
reducing trade barriers on industrial products (tropical agricultural products
being a notable exception). However, under the umbrella of the multilateral
Tokyo Round negotiations, a number of bilateral agreements also emerged that
addressed for the first time tariff and nontariff barriers on temperate
agricultural products.
Review of the negotiations
The seventh round of multilateral trade negotiations opened in Tokyo,
Japan in September 1973. U.S. officials negotiated on tariff reductions under
the general tariff authority found in section 101 of the Trade Act of 1974, and
negotiated on nontariff barriers liberalization under the authority found in
section 102.
21 Distinctions between “multilateral,” “plurilateral,” and “bilateral” trade
agreements can be valid descriptors but can also be subject to different interpretations.
For further details, see section on the Uruguay Round Agreements.
18
The Tokyo Round Agreements were signed on June 30, 1979. The
agreements were incorporated in the Geneva Protocol (1979), which contained
the tariff concessions negotiated by a number of countries during the Round. A
Supplementary Protocol was opened in November 1979 for additional
signatures and concessions.22 Most of the Tokyo Round Agreements entered
into force on January 1, 1980, although a few did so on January 1, 1981. Tariff
reductions were phased in over eight annual stages, beginning on January 1,
1980; U.S. staged reductions for a few more sensitive products’ tariffs were
continued through January 1, 1991.23
Overview of the agreement
Tariff barriers
For agricultural products, multilateral concessions by developed countries
on exports of tropical products from developing countries were the first
concrete results of the Tokyo Round. Most developed countries implemented
their concessions in 1976 and 1977, with further concessions effective as of
1980. Approximately 46 developing countries submitted requests to 11
developed country participants for tariff and nontariff concessions on exports of
tropical products and materials–including agricultural, raw material, mineral,
semimanufactured, and manufactured products containing tropical products. Of
4,300 items with dutiable tariff lines that were tabled as requests,
most-favored-nation (MFN) concessions and GSP concessions were granted on
2,855 tariff lines. Of the 2,855 items, 940 were implemented early in the
negotiations in 1976 and 1977.
For industrial products, the GATT Secretariat estimated in 1980 that the
total value of trade affected by MFN tariff reductions and bindings of
prevailing tariff rates resulting from the Tokyo Round, amounted to more than
$155 billion.24 As a result of these cuts, the GATT estimated that the weighted
average tariff on industrial products among the 19 major participants25 was to
decline from 7.0 to 4.7 percent–a 34 percent reduction in customs duty rates.
The tariff cutting formula known as the “Swiss formula” was designed, in
general, to result in the highest tariffs being reduced by the greatest amount
and, consequently, harmonizing or bringing tariff rates for these countries more
closely together.
22
USTR, Annual Report 1979, pp. 39 to 51.
Pres. Proc. 4707 of Dec. 11, 1979; 44 FR 72348, et seq.
24 GATT, Activities in 1979 and Conclusion of the Tokyo Round of Multilateral
Trade Negotiations (1973-1979) (Geneva: GATT, 1980), pp. 18-20.
25 The 19 major trading partners were Austria, Belgium, Canada, Denmark, the
European Communities, Finland, France, Germany, Ireland, Italy, Japan, Luxembourg,
the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and
the United States.
23
19
Nontariff barriers
The plurilateral agreements26 addressing nontariff barriers for both
agricultural and industrial products negotiated at the Tokyo Round of
multilateral trade negotiations included:
S
Agreement on Technical Barriers to Trade;27
S
Agreement on Government Procurement;
S
Agreement on Interpretation and Application of Articles VI, XVII and
XXIII;28
S
Agreement on Implementation of Article VII;29
S
Agreement on Import Licensing Procedures;
S
Agreement on Implementation of Article VI;30
S
Arrangement Regarding Bovine Meat;
S
International Dairy Arrangement; and the
S
Agreement on Trade in Civil Aircraft.
In addition, the Tokyo Round resulted in several agreements aimed at
improving the systemic functioning of the General Agreement, that is, the
fundamental rules governing the multilateral trading system. These
agreements31 were entitled:
S
Differential and More Favourable Treatment, Reciprocity and Fuller
Participation of Developing Countries;32
S
Declaration on Trade Measures Taken for Balance-of-Payments
Purposes;
26 General Agreement on Tariffs and Trade, The Texts of the Tokyo Round
Agreements (Geneva: GATT, August 1986), pp. iii to v.
27 Also known as the “Standards Code.”
28 Also known as the “Subsidies Code.”
29 Also known as the “Customs Valuation Code.”
30 Also known as the “Antidumping Code.” The Antidumping Code was the only
nontariff barrier agreement negotiated during the 1963-67 Kennedy Round.
31 Whether decisions, declarations, agreements, understandings, undertakings, or
another name, they were commonly referred to collectively as the “Framework
Agreements.”
32 Also known as the “Enabling Cause.”
20
S
Safeguard Action for Development Purposes; and the
S
Understanding Regarding Notification, Consultation, Dispute
Settlement and Surveillance.
Tokyo Round bilateral negotiations
The United States exchanged major bilateral concessions on tariff and
nontariff measures affecting trade in agriculture with Japan, the European
Community (EC), and Canada, and on largely nontariff measures with Finland,
Sweden, Norway, Switzerland, and Austria.33 The United States reached major
bilateral agreements on tariff and nontariff measures affecting trade in
manufactures with Australia, New Zealand, and South Africa.
Japan agreed to bind the duty rate on soybeans at its existing tariff of free.
In 1976, soybeans accounted for $675 million (over 6.7 percent) of total U.S.
exports to Japan. Japan also agreed to undertake to increase its general and
hotel-use import quota for high quality beef from 16,800 to 30,800 tons by
April 1983,with the United States expected to be a major beneficiary. Japan
agreed to reduce tariffs on agricultural products by an average of 18 percent.
The EC agreed to assure market access for a number of agricultural
products, such as beef, poultry, and variety meats; canned fruit cocktail and
peaches; certain fish, table grapes, and spirits (e.g. bourbon whiskey); dried
prunes; rice; and tobacco. Assured market access indicated that the EC would
reduce, harmonize, or bind tariffs, provide tariff-rate quotas, or adjust variable
levy calculations. Of major interest to the United States, the EC agreed to a
tariff-rate quota for high quality beef, with 10,000 tons in-quota that was levy
free, and an over-quota tariff rate of 20 percent ad valorem. Of major interest
to the EC, the United States agreed to increase the U.S. cheese quota from
17,700 to 44,000 tons for the EC.
Canada made concessions to the United States valued at around $600
million and, in exchange, the United States gave concessions amounting to
about $350 million, in 1976 dollars. More than half the trade coverage of these
concessions involved the livestock sector. Duty harmonization was a major
element of trade liberalization in both directions, affecting cattle, pork, corn,
and potatoes.
Australia agreed to reduce tariffs on 91 rate lines, of which tobacco was a
key agricultural product; and computers, construction machinery, and scientific
instruments were key industrial products of interest to the United States. Of
interest to Australia, the United States agreed to liberalize U.S. nontariff
measures controlling meat and dairy imports.
33
USTR, Annual Report 1979, pp. 39 to 51.
21
New Zealand agreed to reduce tariffs on 76 rate lines, of which citrus, rice,
tobacco, and turkey were key agricultural goods; and chemicals, engines,
industrial machinery, medical equipment, and tools were key industrial goods
of interest to the United States. The United States agreed to reduce tariffs on
36 rate lines, principally on meats (beef, lamb, veal), dairy products (butter,
cheese, casein dairy mixtures), wool, and motorboat engines. The United States
also agreed to establish for New Zealand a bilateral quota for cheese of 17,422
tons.
South Africa agreed to reduce tariffs by 50 percent on average for $27
million of U.S. products. South Africa also agreed to eliminate preferential
tariffs on products from the United Kingdom, such as protein derivatives, earth
moving machinery, and tools. The United States agreed to reduce tariffs by 29
percent on average for $74 million of South African products, principally fine
wool, tanning extracts, diamonds, and certain scrap metals.
Impact of the agreement
Tariff negotiations resulted in multilateral tariff reductions covering $126
billion in trade in industrial products among the 19 major developed countries,
according to the 1979 annual report34 of the President to Congress following
the negotiations. The tariff reductions were based on a tariff cutting formula,
although there were a number of exceptions to the formula.35 The cuts
achieved a simple average tariff reduction among the major trading partners of
about 35 percent. For the United States, the average tariff on industrial product
imports was to decline from 6.1 percent ad valorem to 4.2 percent–a 32 percent
reduction.36 Multilateral tariff negotiations for agricultural products centered
largely on concessions given by developed countries on exports of tropical
products from developing countries. A number of bilateral trade negotiations
on agriculture also emerged from the Tokyo Round, largely among the
developed countries, and focused more on “market access measures”37 where
the combined effect of tariff and nontariff measures was difficult for
negotiators to address separately.
34
USTR, Annual Report 1979, pp. 39 to 51.
The formula settled upon in December 1978 was originally proposed by
Switzerland and, hence, was known as the “Swiss formula.”
36 USTR, Annual Report 1979, p. 50.
37 USTR, Annual Report 1979, pp. 39 to 51.
35
22
1985 United States-Israel Free Trade Area
Agreement
Setting
Following the failure to launch a new round of multilateral trade
negotiations in 1982, U.S. trade policy efforts shifted focus toward bilateral
and plurilateral discussions to liberalize trade.38 Israel originally proposed the
idea of a free trade area between the United States and Israel in 1981.39 In
November 1983, President Reagan and Israeli Prime Minister Shamir agreed to
begin bilateral negotiations on a reciprocal free trade area between the United
States and Israel. At the time, U.S. exports to Israel suffered from a severe
tariff disparity as compared to exports from the EC, owing to an EC-Israel
preferential trade agreement for industrial products. In addition to broader
political goals involved in closer U.S.-Israelities, the U.S.-Israel FTA also
sought to overcome this economic disadvantage for U.S. products.
Review of the negotiations
Negotiations began formally on January 17, 1984.40 Section 1101
(extension of nontariff barrier negotiating authority) of the 1979 Trade Act had
extended section 102 authority of the 1974 Trade Act to negotiate nontariff
barriers, as well as the section 151 provisions of the 1974 Trade Act under
which Congress agreed to consider the agreement and its implementing
legislation under the fast-track approval procedures.41 An agreement was
signed on April 22, 1985 that was to eliminate tariff and nontariff barriers on
most products traded between the United States and Israel by January 1,
1995.42 The agreement was submitted to the Congress for approval on April
29, 1985, along with its statement of administrative action.43 Congress
approved the U.S.-Israel Free Trade Area Implementation Act of 1985,44 which
38 Staff of the U.S. House of Representatives, Committee on Ways and Means,
Trade Legislation Enacted into Public Law – 1981 through 1988, Committee print,
Jan. 27, 1989, 101st Cong., 1st Sess. (Washington DC, GPO: 1989), pp. 163-167.
39 USTR, Annual Report 1984-85, p. 97.
40 Ibid.
41 Ibid.
42 Committee on Ways and Means, Trade Legislation, Committee print, pp. 163-167.
43 Committee on Ways and Means, Trade Legislation, Committee print, pp. 163-167.
This notification began the period of 60 legislative days during which either the Senate
Committee on Finance or the House Committee on Ways and Means could disapprove
consideration of the agreement under the fast-track approval procedures of the 1974
Trade Act.
44 Pub. L. 99-47 (H.R. 2268), 99 Stat. 82. See 19 U.S.C. 2112(b) and accompanying
note.
23
was signed into U.S. law on June 11, 1985.45 The U.S.-Israel Free Trade
Area agreement was the first reciprocal bilateral agreement negotiated by the
United States.
Overview of the agreement
The agreement eliminated tariffs for various products according to four
different schedules: (1) upon entry into force of the agreement; (2) in 3
reductions to January 1, 1989; (3) in 8 reductions to January 1, 1995; and (4)
after a 5-year period of no reductions, by negotiated reduction by January 1,
1995.46 In the area of nontariff barriers, the agreement ended a variety of trade
distorting practices. First, Israel agreed to eliminate export subsidies on
industrial products, including processed agricultural goods. Israel agreed to
accede to the GATT Subsidies Code on or before the agreement became
effective. Second, the United States and Israel agreed to disciplines on taking
actions for balance-of-payments reasons. Third, Israel agreed to automatic
licensing for virtually all nonagricultural products, unless a specific reason is
provided for nonautomatic licensing. Fourth, both countries agreed they could
maintain import restrictions for agricultural policy purposes, with the exception
of customs duties. Finally, the United States and Israel agreed to lower the
GATT threshold for mutual procurement in order to expand access to their
government procurement markets. The agreement also contains detailed
safeguard provisions modeled after section 201 of the Trade Act of 1974;
dispute settlement procedures; rules of origin similar to those detailed in the
Caribbean Basin Economic Recovery Act;47 and provisions for consultations
through an ongoing Joint Committee.
1988 United States-Canada Free Trade Agreement
Setting
In late 1983, Canada released a comprehensive review of its trade policy
during the early 1980s,48 which highlighted the importance of U.S. trade to
Canada, but rejected the idea of a comprehensive, preferential free trade
agreement between the United States and Canada. The review instead
recommended limited free trade agreements for particular sectors, resembling
the 1965 U.S-Canada Auto Pact. Sectors initially considered by Canada as
45
Committee on Ways and Means, Trade Legislation, Committee print, pp. 163-167.
Committee on Ways and Means, Trade Legislation, Committee print, pp. 163-167.
47 These rules of origin were essentially the judicially interpreted “substantial
transformation” standard, under 19 U.S.C. 1304, as amended.
48 USTR, Annual Report 1984-85, p. 98.
46
24
possibilities for such negotiations included steel, urban mass transit,
petrochemicals, and textiles and clothing. Several joint working groups were
established in 1984 to examine the possibility of negotiating these sectoral
agreements. However, these working groups remained dormant during the
Canadian election campaign that began in the summer of 1984. Once elected
in September 1984, the new government of Prime Minister Mulroney began
a review of ways to promote freer trade with the United States.
Review of the negotiations
On September 26, 1985, Prime Minister Mulroney formally requested that
the United States and Canada open negotiations on a United States-Canada
Free-Trade Agreement.49 U.S. negotiators held talks under section 102
authority of the 1974 Trade Act, which had been extended by the 1979 Trade
Act through January 3, 1988. Negotiations began on June 17, 1986. On
October 3, 1987, President Reagan notified the Congress of his intention to
enter into a free trade agreement with Canada. Negotiators completed a final
text on December 9, 1987.50 On January 2, 1988, President Reagan and Prime
Minister Mulroney formally entered into the agreement. On July 25, 1988, the
President transmitted to the Congress the United States-Canada Free-Trade
Agreement Implementation Act of 1988. The Congress passed the act and on
September 28, 1988, the President signed the act into law. The U.S-Canada
FTA took effect on January 1, 1989.51
Overview of the agreement
The U.S-Canada FTA eliminated all tariffs on originating goods, reduced
many nontariff barriers, liberalized investment practices, provided ground rules
covering trade in services, and supported efforts at multilateral trade
liberalization. Much of the value of the agreement to the United States lay
outside the tariff area, by increasing the stability of cross-border trade, and by
assuring that long-term commitments could be made by businesses and
exporters without fear of arbitrary disruption from direct import restriction or
other measures. The agreement addressed factors affecting trade in services, an
area of increasing economic importance. Cross-border investment was also
49
USTR, Annual Report 1988, pp. 21-24.
USTR, Annual Report 1988, pp. 21-24.
51 The CFTA remains in force technically, although it has been effectively
suspended by adoption of the NAFTA. The NAFTA has incorporated all the bilateral
CFTA obligations that the parties agreed should be continued under the NAFTA.
50
25
addressed in an effort to make this area more efficient.52 In 1987, total
bilateral goods and services trade between the two countries exceeded $166
billion.
The U.S-Canada FTA contained 21 chapters in eight broad sections: (1)
objectives and scope; (2) trade in goods; (3) government procurement; (4)
services, investment and temporary entry; (5) financial services; (6)
institutional provisions; (7) other provisions; and (8) final provisions. The first
section on objectives and scope comprising chapter 1 and 2 covers the overall
aims of the agreement and the general definitions used in the agreement.
Section 2 on trade in goods, comprising chapters 3 through 12, covers rules of
origin for goods, border measures, national treatment, technical standards,
agriculture, wine and distilled spirits, energy, trade in automotive goods,
emergency action, and exceptions for trade in goods. Section 3 in chapter 13
covers government procurement. Section 4, comprising chapters 14 through 16,
covers services, temporary entry for business persons, and investment. Section
5, in chapter 17, covers financial services. Section 6, comprising chapters 18
and 19, covers institutional provisions, and binational dispute settlement in
antidumping and countervailing duty cases. Section 7, in chapter 20, covers
other provisions. Section 8, in chapter 21, covers final provisions.
Impact of the agreement
The summary of the agreement’s effects submitted by the Administration in
its documentation to Congress estimated that duty-free trade between the two
countries would result in a gain of between $1 billion and $3.5 billion in
annual U.S. welfare.53 U.S. exports to Canada were projected to increase by as
much as $2.4 billion compared to a Canadian gain of $1.1 billion. Although
more difficult to quantify, liberalization of nontariff barriers was to provide
significant opportunities for U.S. businesses and exporters.
1993 North American Free Trade Agreement
Setting
After the U.S-Canada negotiations, the United States continued its bilateral
and regional thrust toward trade liberalization with similar negotiations held
52 President of the United States, “Statement of Administrative Action” (hereafter
“SAA-CFTA”), p. 2-7; found at President of the United States, Communication from the
President of the United States transmitting the Final Legal Text of the U.S.-Canada
Free-Trade Agreement, the Proposed U.S.-Canada Free-Trade Agreement
Implementation Act of 1988, and a Statement of Administrative Action, Pursuant to 19
U.S.C. 2112(e)(2), 2212(a), 100th Cong., 2d Sess., H. Doc. 100-216, July 26, 1988,
(GPO: Washington DC, 1993), p. 727-730 (hereafter, H. Doc. 100-216).
53 SAA-CFTA; found at H. Doc. 100-216, pp. 3 to 7.
26
with its southern neighbor, Mexico. In June 1990, the United States and
Mexican Presidents endorsed the goal of a comprehensive free trade
agreement (FTA) between the United States and Mexico, and instructed their
ministers to open negotiations. Congress had renewed U.S. trade agreement
authority in the Omnibus Trade and Competitiveness Act of 1988,54 which,
although focused primarily on the next round of multilateral trade
negotiations that began in 1986, also permitted U.S. negotiators to establish
regional and bilateral trade agreements if possible.
Review of the negotiations
Following the June 1990 announcement, Canada expressed interest in
three-way negotiations between the United States, Mexico, and Canada.
Negotiations formally began in June 1991 and proceeded quickly based on
previous bilateral discussions held between the United States and Mexico
earlier when Mexico was preparing to accede to the GATT in 1986.
On August 12, 1992, Canada, Mexico, and the United States announced the
completion of the negotiations, 14 months after they began.55 The President
submitted to Congress on November 3, 1993 the legislative package necessary
for the agreement to be considered under the fast-track approval procedures.
The package included the text of the agreement, schedules of concessions, an
implementing bill, a Statement of Administrative Action required to implement
the agreement, and certain administration statements required by Congress on
how the agreement would affect U.S. economic interests. The U.S. House of
Representatives approved the legislation on November 17, 1993; the U.S.
Senate on November 20, 1993. Mexico ratified the agreement on November
22, 1993; and Canada proclaimed the legislation on December 30, 1993. The
NAFTA entered into force on January 1, 1994.
Overview of the agreement
The NAFTA is a regionwide trade agreement aimed at progressively
eliminating tariff and nontariff barriers to trade in originating goods, improving
access for trade in services, establishing rules for investment, strengthening
54
Pub. L. 100-418, 102 Stat. 1102, 19 U.S.C. 2902. For further details, see the
section on the Uruguay Round Agreements.
55 USTR, Annual Report 1993, pp. 45-46. On Sept. 25, 1990, President Bush
notified the Senate Finance and the House Ways and Means Committees of his intent to
negotiate an FTA with Mexico.This notification began the period of 60 legislative days
during which either committee could decline in advance to consider any trade agreement
negotiated under this authority using the fast- track approval procedures.The President
also indicated that Canada had expressed a strong desire to participate in three-way
negotiations with Mexico and the United States. On Feb. 5, 1991, the President again
informed the two committees of the decision by the three governments to proceed with
trilateral negotiations toward forming a North American FTA. USTR, Annual Report
1991, pp. 78-79.
27
protection for intellectual property rights, and creating an effective dispute
settlement mechanism. Most tariff and nontariff barriers on eligible industrial
products will be gradually eliminated over 10 years, including barriers to
textiles and apparel that have substantial regional content. Moreover, the
agreement provides that tariffs and most nontariff barriers on agricultural
products will be phased out over 15 years. Investment rules aim to ensure
national treatment and eliminate or significantly reduce most performance
requirements in all sectors, particularly in investment barriers in the
petrochemical and financial sectors in Mexico. The agreement liberalizes
trade in services–in particular financial, land transportation, and
telecommunications services–and also aims to protect intellectual property
rights. It creates a dispute resolution structure and contains mechanisms to
enforce national labor and environmental laws. Last, the NAFTA provides
funds for environmental infrastructure and community adjustment along the
U.S.-Mexican border.56
The NAFTA contains eight broad sections, both substantive and
institutional: (1) general objectives and definitions; (2) trade in goods; (3)
technical barriers to trade; (4) government procurement; (5) investment,
services, and related matters; (6) intellectual property; (7) administrative and
institutional provisions; and (8) final provisions. What follows is a brief
overview of the agreement’s provisions, drawing upon implementation
documents submitted to Congress as part of its approval procedure for the
agreement.57
Objectives
The first section contains chapters 1 and 2, which cover the objectives
(establishment of the free trade area; objectives; relation to other agreements,
including environmental and conservation agreements; and the extent of
obligations) and the general definitions used in the agreement.58
56
CEA, Economic Report of the President, 1995, pp. 220-221.
President of the United States, “Statement of Administrative Action”; (hereafter
“SSA-NAFTA”); found at President of the United States, Message for the President of
the United States transmitting North American Free Trade Agreement, Texts of
Agreement, Implementing Bill, Statement of Administrative Action and Required
Supporting Statements, 103d Cong., 1st Sess., H. Doc. 103-159, Vol. 1, Nov. 4, 1993,
(GPO: Washington DC, 1993), (hereafter, H. Doc. 103-159).
58 North American Free Trade Agreement between the Government of the United
States of America, the Government of Canada and the Government of the United
Mexican States, vol. I, 1993 (hereafter NAFTA); found at H. Doc. 103-159.
57
28
Trade in goods
The provisions covering trade in goods are contained in chapters 3 through
8. NAFTA’s principal rules governing trade in goods, which are found in
chapter 3, require nondiscriminatory national treatment and trade between
NAFTA countries; a phaseout of tariffs on qualifying goods produced in North
America and traded between Canada, Mexico, and the United States; and the
elimination of a wide variety of nontariff barriers and trade distorting
measures.59 Chapter 4 establishes the rules of origin to identify the goods that
will be deemed to originate in the territories of the NAFTA parties and thus
eligible for the benefits of the agreement.60 Chapter 5 establishes procedures
for customs administrations in each NAFTA country to follow, ensuring that
uniform treatment of goods under NAFTA’s rules of origin and marking rules
will channel the benefits of lower tariffs to firms and individuals producing and
trading qualifying goods within North America.61 In general, goods wholly
produced in the NAFTA region, meeting listed changes in tariff classification
and other criteria, or made in the region from originating materials qualify for
NAFTA benefits.
Chapter 6 establishes specific rules for trade in energy products and
petrochemicals. It also covers certain Mexican reservations (exceptions)
regarding NAFTA rules governing national treatment of investments in the
energy and petrochemicals sectors, and governing trade in services related to
these sectors.62 Chapter 7 addresses the agriculture sector and sets out separate
agricultural market access agreements between Mexico and the United States,
and between Mexico and Canada. When considered in combination with the
U.S-Canada FTA, these provisions largely create three separate bilateral
agreements on agriculture between the NAFTA governments, rather than one
trilateral agreement. Chapter 7 also deals with sanitary and phytosanitary (SPS)
measures that protect human, animal, and plant life and health from risks of
plant- and animal-borne pests and diseases, and from risks of additives and
contaminants in foods and feedstuffs. The NAFTA establishes general
requirements and procedures so that SPS measures do in fact protect against
the risk targeted and do not act as disguised trade barriers.63 Finally, chapter 8
sets out procedures and remedies available to domestic industries that have
sustained, or are threatened by, serious economic injury due to increased
imports. Special safeguard provisions apply elsewhere to agricultural and
textile products.64
59
60
61
62
63
64
SAA-NAFTA, p. 18; found at H. Doc. 103-159, p. 467.
Ibid., p. 43; at p. 492. See general note 12 to the HTS.
Ibid., p. 50; at p. 499.
Ibid., p. 62; at p. 511.
Ibid., p. 67, at p. 516; and SAA, p. 88, at p. 537.
Ibid., p. 109; at p. 558.
29
Technical barriers to trade
Technical barriers to trade are covered by chapter 9, which establishes
several procedural requirements concerning standards-related measures. Such
measures include voluntary and mandatory product or service standards and the
procedures used to determine whether a particular product or service meets
these standards. This chapter establishes the requirements and procedures
intended to distinguish legitimate measures taken to protect a nation’s domestic
interests from those measures that are obstacles to trade.65
Government procurement
Government procurement obligations are contained in chapter 10, which
requires the three NAFTA countries to eliminate “Buy National” restrictions on
the majority of nondefense goods and services that are supplied by firms in
North America to the federal governments of member states.66
Investment and services
Chapters 11 through 16 on investment, services, and related matters set out
the investment obligations of member governments toward investors from other
NAFTA parties, provisions regarding cross-border trade in services and specific
services sectors such as telecommunications and financial services, as well as
provisions addressing competition policy and the entry of business persons
engaged in investment or services matters. In chapter 1, each government
agrees to four basic protections for investments made by persons from other
NAFTA countries. These obligations include: (1) nondiscriminatory treatment;
(2) freedom from performance requirements; (3) free transfer of funds related
to an investment; and (4) expropriation only in conformity with international
law. Chapter 11 also provides a mechanism for the settlement of disputes
between an investor and the state, patterned after the standard investor-state
dispute mechanism found in a U.S. bilateral investment treaty. This mechanism
permits an investor to submit a claim to binding arbitration under
internationally accepted rules.67
Chapter 12 establishes the basic rules regulating trade in services, which
parallel those in the agreement regulating trade in goods. Each country retains
the right to set licensing standards for trade in services, provided the actions
are nondiscriminatory.68 Chapter 13 addresses measures affecting access to and
use of public telecommunications networks, as well as measures affecting the
65
Ibid.,
Ibid.,
67 Ibid.,
68 Ibid.,
66
30
p.
p.
p.
p.
120;
134;
140,
150;
at
at
at
at
p.
p.
p.
p.
569.
583.
589; and p. 145, at p. 594.
599.
right of firms and individuals from member countries to provide such
services. It contains rules to protect firms that operate private communication
networks, or provide enhanced services or computer services over another
signatory’s basic telephone network.69 Chapter 14 sets down national
treatment rules governing how each NAFTA government must treat financial
institutions from other NAFTA parties operating in its territory. These rules
cover financial institutions owned by investors from other NAFTA countries,
investors who own or seek to own such institutions, and persons in other
NAFTA countries that provide financial services on a cross-border basis. The
rules apply to government measures in the financial sector at the federal,
state, and local level.70
Chapter 15 on business conduct focuses on monopolies and state
enterprises and is designed to complement and support the market-opening
objectives of the agreement, particularly relating to the energy sector.71 Chapter
16 addresses the temporary entry of business persons that are citizens of other
NAFTA countries while preserving each country’s right to protect its domestic
labor force and carry out its own immigration policies.72
Intellectual property rights
The section on intellectual property establishes comprehensive standards
for the protection and enforcement of intellectual property rights in the three
NAFTA countries. These rules require each government to apply the
substantive provisions of the world’s most important intellectual property
conventions, to include additional protections, and to enforce critical
procedures to safeguard these rights.73
Institutional provisions
The section on institutional provisions sets rules to foster transparency in
administering the agreement, establishes several bodies to provide
administrative support, and establishes general and specific dispute settlement
procedures for antidumping and countervailing duty matters. Chapter 18
includes requirements regarding the publication, notification, and
administration of laws aimed at promoting the open and fair application of
measures covered by the agreement.74 Chapter 19 sets out procedures for
binational panel review of final antidumping and countervailing duty
69
70
71
72
73
74
Ibid.,
Ibid.,
Ibid.,
Ibid.,
Ibid.,
Ibid.,
p.
p.
p.
p.
p.
p.
160;
163;
173;
174;
184;
193;
at
at
at
at
at
at
p.
p.
p.
p.
p.
p.
609.
612.
622.
624.
633.
642.
31
determinations, and for notification and review of trade law amendments.75
Chapter 20 sets out detailed procedures for government-to-government
dispute resolution under the NAFTA. This chapter also establishes a Free
Trade Commission, the central institution of the NAFTA comprising ministers
or similar officials designated by each country, and creates a NAFTA
Secretariat to provide support to the Commission.76
Exceptions
Chapter 21 spells out general, national security, taxation,
balance-of-payments, disclosure of information, and cultural industries
exceptions to all or part of the agreement.77 In chapter 22, provisions are made
regarding the agreement’s annexes, amendments to the agreement, its entry into
force, accession to and withdrawal from the agreement, and the authentic text
of the agreement.78
Impact of the agreement
The impact of the NAFTA on national income growth has proven difficult
to isolate from other factors, particularly as the agreement’s provisions are still
in transition. Since the NAFTA went into effect in 1994, total trade has
increased among Canada, Mexico, and the United States by approximately 128
percent, from $297 billion in 1994 to $676 billion in 2000, according to recent
estimates cited by the administration.79 The share of U.S. goods exported to
NAFTA partners has increased from 14 percent to 37 percent during this period
as trade restrictions previously limiting U.S. exports have decreased
significantly. Nearly all of the $406 billion in bilateral trade in goods between
Canada and the United States currently enters free of duty. When the
agreement is fully implemented, some estimates have suggested that U.S. GDP
could experience an increase between 0.1 percent and 0.5 percent, or roughly
$10 billion to $50 billion relative to the size of the U.S. economy in 2000.80
75
Ibid., p. 194; at p. 643.
Ibid., p. 208; at p. 657.
77 Ibid., p. 217; at p. 666.
78 NAFTA, p. 22-1; at p. 1292.
79 CEA, Economic Report of the President, 2002, pp. 279-280.
80 CEA, Economic Report of the President, 2002, pp. 279-280. The report does not
cite specific studies. Also, note that NAFTA has not yet been fully implemented. Results
reported in chapter 7 of the current study reflect implementation as of 2001.
76
32
1994 Uruguay Round Agreements
Setting
In September 1986, the ministerial declaration in Punta del Este, Uruguay,
launched the eighth round of multilateral trade negotiations known as the
Uruguay Round. Although the major trading nations had sought to begin
another round of negotiations after the Tokyo Round Agreements entered into
force, these efforts failed in 1982 when many countries proved unwilling to
make fresh concessions to liberalize world trade at a time of world recession.
After further efforts and several years of delay, these negotiations began slowly
in 1986.81
U.S. trade agreement negotiating authority was also delayed until the
Congress passed the Omnibus Trade and Competitiveness Act of 1988, which
was signed into law August 23, 1988. Section 1102(a) (agreements regarding
tariff barriers) and section 1102(b) (agreements regarding nontariff barriers) of
the 1988 Trade Act authorized the President to enter into trade agreements
concerning tariff and nontariff barriers provided that the agreements made
progress toward meeting the trade negotiating objectives set out in section 1101
of the 1988 Trade Act.82 Trade agreement negotiating authority was granted
through May 31, 1993, and U.S. implementing legislation for resulting
agreements was subject to fast-track approval procedures. On July 2, 1993, the
Congress amended section 1102 authority to extend these approval procedures
from May 31, 1993 to April 16, 1994, to allow negotiators to conclude the
Uruguay Round negotiations. This extension was subject to the President
notifying the Congress of his intent to enter into an agreement at least 120 days
prior to signing such a trade agreement (that is, by December 15, 1993).
81
CEA, Economic Report of the President, 1986, p. 122.
Section 1101 (19 U.S.C. 2902) sets out 16 principal negotiating objectives that
involved (1) dispute settlement, (2) improvement of the GATT and multilateral trade
negotiation agreements, (3) transparency, (4) developing countries, (5) current account
surpluses, (6) trade and monetary coordination, (7) agriculture, (8) unfair trade practices,
(9) trade in services, (10) intellectual property, (11) foreign direct investment, (12)
safeguards, (13) specific barriers, (14) worker rights, (15) access to high technology, and
(16) border taxes. More broadly, section 1101 also elaborated 3 overall objectives,
charging U.S. negotiators to obtain (1) more open, equitable, and reciprocal market
access; (2) the reduction or elimination of barriers and other trade-distorting policies and
practices; and (3) a more effective system of international trading disciplines and
procedures.
82
33
Review of the negotiations
In December 1988, negotiators held a mid-term review of progress in
Montreal, Canada, to take stock of the Uruguay Round negotiations to date.83
As disagreements over trade in agriculture played a lead role in the 1982
failure to launch new trade talks, so too did the same disagreements postpone
conclusion of the mid-term review until April 1989. Nonetheless, the review
did streamline the GATT dispute settlement procedures, institute the Trade
Policy Review Mechanism on a provisional basis, and even produced some
agreement concerning agricultural trade–specifically, the early implementation
of market access concessions on imports of tropical agricultural products
important to developing countries.
The Uruguay Round was scheduled to conclude in December 1990 in
Brussels, Belgium, but an impasse over how to reform trade in agriculture
deadlocked the ministerial conference. Subsequently, the GATT
Director-General consulted with members about resuming negotiations until a
draft text containing the likely elements of a final agreement emerged in
December 1991. This draft Final Act became the basis for several more years
of discussion. In November 1992, the United States and the European Union
(EU) settled their differences concerning agriculture in the so-called Blair
House accord. In July 1993, the four major trading partners–Canada, EU,
Japan, and the United States–announced a market access agreement as part of
an effort to push for a conclusion to the Uruguay Round. On December 15,
1993, the Uruguay Round of negotiations was concluded for all issues. On
April 15, 1994, ministers met in Marrakesh, Morocco to sign the Uruguay
Round Agreements among 125 participating governments.
Overview of the agreement
Goods, services, and intellectual property
The Uruguay Round of multilateral trade negotiations took more than 7
years to conclude, but once finished, it surpassed all other rounds of trade and
tariff negotiations in the breadth of topics covered. While all previous rounds
had failed to cover trade in agriculture in any substantive manner, the Uruguay
Round Agreements included an Agreement on Agriculture that covered trade in
agricultural products on the same basis as trade in industrial products. Though
previous rounds applied only to trade in goods, the Uruguay Round
Agreements apply to trade in goods, trade in services, and trade-related aspects
of intellectual property rights, thus extending the multilateral trading rules to
83
This section is based largely on material provided by the WTO, “Trading into the
Future: the Introduction to the WTO,” April 1999, 2d edition; also available at Internet
address http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact5_e.htm, retrieved on
Oct. 29, 2002.
34
cover the technological progress and globalization of production that has
been transforming economies since the Second World War.
Single integrated package of agreements
Negotiators of the Uruguay Round incorporated all the resulting
agreements together into a single package, so that a government accepting the
rights and obligations of any one agreement had to accept the rights and
obligations in all the multilateral agreements. This package included an
integrated dispute settlement system intended to apply to all the Uruguay
Round Agreements and member countries, something lacking under previous
multilateral trading rules. Finally, the negotiators in the Uruguay Round agreed
to institutionalize these rules by establishing an international organization–the
World Trade Organization–to administer the Uruguay Round Agreements in a
consistent manner.
WTO agreement and integral annexes
The Uruguay Round Agreements consist collectively of 22 agreements and
some 30 ministerial decisions and declarations. On April 15, 1994, ministers
signed in Marrakesh, Morocco, the “Final Act Embodying the Results of the
Uruguay Round of Multilateral Trade Negotiations,” a one-page document that
indicated that they would submit for ratification to their legislatures a second
document–the Marrakesh Protocol Establishing the World Trade Organization.
Ratification of the WTO Agreement means that a government accepts not only
the slim 12-page text of the WTO Agreement, but also the voluminous annexes
that are an integral part of the agreement. The annexes comprise Annex 1 [no
title], which contains three parts: Annex 1A–the Multilateral Agreements on
Trade in Goods; Annex 1B–the General Agreement on Trade in Services; and
Annex 1C–the Agreement on Trade-Related Aspects of Intellectual Property
Rights; Annex 2–the Dispute Settlement Understanding; Annex 3–the Trade
Policy Review Mechanism; and Annex 4–the Plurilateral Agreements.
Annex 1A covers the multilateral agreements on trade in goods, containing
a large number of separate agreements. These agreements cover agriculture,
sanitary and phytosanitary measures, textiles and clothing, technical standards,
investment measures, customs valuation, antidumping measures, preshipment
inspection, rules of origin, subsidies and countervailing measures, and
safeguards. Annex 1B contains the General Agreement on Trade in Services, or
GATS. The GATS is the first multilateral framework devised to address trade
in services, an increasingly important component of world trade and the world
economy. Annex 1C contains the Agreement on Trade-Related Aspects of
Intellectual Property Rights, also known as the “TRIPs Agreement,” the first
multilateral agreement to bring intellectual property rights into the GATT
framework of international trade disciplines. Annex 2 contains the
Understanding on Rules and Procedures Governing the Settlement of Disputes,
commonly known as the Dispute Settlement Understanding. The Dispute
35
Settlement Understanding is an integral part of the package of Uruguay Round
Agreements and aims to provide a unified dispute settlement mechanism across
all the Uruguay Round Agreements overseen by the WTO, a unified approach
that was lacking under the previous GATT 1947 arrangement overseen by the
GATT Secretariat. Annex 3 contains the Trade Policy Review Mechanism, a
means by which member government trade policies can be examined to
highlight policies that support the multilateral trading system as well as those
that may not adhere to multilateral trade disciplines. Annex 4 covers several
separate plurilateral agreements, which are administered through the WTO
structure. Originally, in 1995, there were four plurilateral agreements: (1) the
Agreement on Trade in Civil Aircraft; (2) the Agreement on Government
Procurement; (3) the International Dairy Agreement; and (4) the International
Bovine Meat Agreement. However, in 1997 the two sectoral agreements on
bovine meat and dairy products were terminated, leaving only the Agreement
on Government Procurement and the Agreement on Trade in Civil Aircraft in
Annex 4 of the Uruguay Round Agreements.
In principle, a plurilateral agreement differs from a multilateral one in that
the specific signatories to a plurilateral agreement receive additional rights in
exchange for accepting additional obligations. Although all WTO members are
signatories to the multilateral agreements embodied in the Uruguay Round
Agreements and all members receive the same rights in exchange for accepting
the same obligations, only the signatories to the plurilateral agreements are
entitled to the rights provided by the additional rules found in the plurilateral
agreement in exchange for accepting additional obligations that complement
the multilateral WTO rules. Nonetheless, despite the separate nature of the
plurilateral agreements, they are administered under the framework of the
WTO institutionally in that the plurilateral disciplines extend or complement
multilateral WTO rules.
GATT 1947 vs. GATT 1994
Annex 1A also includes several legal instruments of importance–the
General Agreement on Tariffs and Trade 1994 (GATT 1994), and the
Marrakesh Protocol to the GATT 1994. The very first provision in Annex 1A
incorporates the provisions of the General Agreement on Tariffs and Trade
1947 (GATT 1947) and subsequently revises the interpretation of several
GATT articles, to form the GATT 1994. The GATT 1947 entered into force on
January 1, 1948, to reflect tariff negotiations held in 1947 and their attendant
multilateral rules on trade in goods. The GATT 1994 entered into force on
January 1, 1995, to reflect the Uruguay Round multilateral trade negotiations
held from 1986 to 1993. Although GATT 1947 and GATT 1994 contain
essentially the same provisions, they are nonetheless legally distinct from one
another under international law, and a country could sign only one of them.
Whereas the 1947-48 Havana Conference discussed an International Trade
Organization intended to administer the GATT 1947 trade rules governing the
1947 tariff negotiations, the International Trade Organization was never
36
established. This lapse left the GATT 1947 to continue as a framework of trade
rules for nearly 50 years, but with no major supporting institution. In contrast,
the World Trade Organization was established specifically to administer the
GATT 1994, both entering into force on January 1, 1995.
Marrakesh Protocol of national schedules of commitments
Annex 1A also includes the Marrakesh Protocol to the GATT 1994, a
protocol that marks the legal and notional location within the framework of the
Uruguay Round Agreements where WTO Members affix their national
schedules of concessions and commitments as negotiated during the Uruguay
Round. If considered literally, this section comprises thousands of pages of
national schedules of concessions that are similar to national tariff schedules. It
should be noted that market access concessions made as part of the negotiation
of a multilateral agreement often do not appear explicitly under multilateral
agreements but instead exist only in national schedules of concessions and
commitments, e.g. the overall Uruguay Round multilateral commitment for
developed countries to reduce their agricultural export subsidies by 36 percent
over 6 years.
Impact of the agreement
Estimates of the impact of the Uruguay Round Agreements prove difficult
owing to their continuing implementation and the difficulty of disentangling
the agreements’ effects from current events. In 1994, the GATT Secretariat
released its overview of the results of the round.84 The report said that
estimates of the value increase in world income due to the liberalization of
trade in goods ranged from $109 billion to $510 billion by the end of the
agreements’ implementation period in 2005. Estimates of the volume increase
of world trade in goods ranged from 9 percent to 24 percent by 2005. Annual
income gains–based on the upper range assumption of $510 billion by
2005–were estimated to be roughly $122 billion for the United States, $164
billion for the EU, $27 billion for Japan, and $116 billion for the developing
countries and economies in transition85 as a single group.
For agricultural products, countries agreed to maintain current access, and
if current access was not at 3 percent of domestic consumption countries made
a minimum access commitment at 3 percent with a commitment to increase to
5 percent by the end of the implementation period. The United States agreed to
minimum market access commitments for, among others, 0.81 million tons of
wheat, 1.8 million tons of coarse grains, 1.1 million tons of rice, and 0.73
million tons of dairy products. The participants’ agreement to the tariffication
of all agricultural products means that virtually only tariff barriers should
84 GATT Secretariat, The Results of the Uruguay Round of multilateral trade
negotiations – Market access for goods and services: Overview of the results, November
1994 (Geneva: GATT, 1994).
85 This category comprises essentially the formerly centrally planned economies of
Central and Eastern Europe.
37
remain in principle to distort trade in agriculture once all provisions are fully
implemented. Participants also agreed to bind essentially 100 percent of
agricultural tariffs, and to reduce those tariff by a weighted average of 36
percent, and not less than 15 percent for each tariff line. Bound tariff rates
provide traders and investors with substantially greater market security and,
as a consequence, can promote increased trade. Participants agreed to a 36
percent reduction in agricultural export subsidies, decreasing from $22.5
billion to $14.5 billion. Participants further agreed to a reduction in
agricultural domestic support subsidies of 18 percent, decreasing from $197
billion to $162 billion, in total.
For industrial products, the developed countries agreed to tariff reductions
that declined from an average of 6.3 percent ad valorem to 3.8 percent, roughly
a 40 percent reduction. The proportion of industrial products entering
developed country markets at a tariff rate of free (duty-free) is scheduled to
double from 20 percent to 44 percent by 2005. The percentage of bound tariff
rates rose from 78 percent to 99 percent for developed countries, from 21
percent to 73 percent for developing countries, and from 73 percent to 98
percent for transition economies. In the first multilateral negotiation of its kind,
the participants agreed to market access commitments regarding trade in
services. In addition, the Uruguay Round Agreements succeeded–through the
Agreement on Textiles and Clothing–in establishing a framework under which
international trade in textiles and clothing could be brought under GATT
disciplines in the multilateral trading system. The agreement’s 10-year phaseout
of quotas is scheduled to conclude on January 1, 2005, when all remaining
textile and clothing quotas are to be fully integrated into the GATT.
38
CHAPTER 3:
Economic Changes in the United
States Since the Beginning of
the Tokyo Round
In 1974, the year Congress first granted the President fast-track negotiating
authority, the applied U.S. tariff rate on imported goods was 4.64 percent.1 By
2001, the applied tariff rate had fallen to 1.59 percent.2 Tariff reductions, other
U.S. trade policy changes, and reductions in foreign trade barriers–along with
other factors such as growing incomes and improved transportation and
communication technologies–increased the real value of U.S. trade in goods
and services3 from $0.5 trillion in 1974 to $2.5 trillion in 2001.4 During that
time, trade has grown faster than overall U.S. economic activity. The ratio of
U.S. trade to GDP was 0.12 in 1974 and 0.28 in 2001.5
While growing international trade has undoubtedly affected the U.S.
economy, a number of other changes were probably just as significant. The past
three decades have seen substantial technological progress, deregulation of
several large service industries, sizable increases in workers’ average education
level, and substantial growth in both the capital stock and the size of the
population. The effects of these and other changes on the U.S. economy
complicate efforts to measure the economic impact of trade agreements.
The principal purpose of this study is to identify those economic outcomes
that can be credibly traced to trade policy changes. The key analytical
difficulty in any such exercise is distinguishing the effects of trade policy from
the effects of other sources of economic change. In the studies reviewed in
1
The World Bank Group, World Development Indicators, CD--ROM. The applied
tariff rate is calculated by dividing the value of import duties collected by the value of
total imports. This measure tends to understate the true size of average tariffs because
importers substitute away from high tariff goods. It is included here as an indicative
aggregate measure of the degree to which the U.S. has reduced its tariffs over time.
2 USITC calculations from U.S. Department of Commerce data.
3 Total U.S. trade is measured as the value of imports plus the value of exports.
4 USITC calculations from U.S. Department of Commerce (USDOC), Bureau of
Economic Analysis, “Survey of Current Business,” August 2002. Trade is measured in
constant 1996 dollars.
5 USITC calculations from USDOC, Bureau of Economic Analysis, “Survey of
Current Business,” August 2002.
39
subsequent chapters, researchers take different approaches to identifying the
effects of trade and/or trade policy changes on the U.S. economy.
Conclusions about the economic effects of trade and trade policy changes
necessarily depend on the way in which a study controls for other sources of
economic change. Because changes not related to trade policy have been so
substantial, and because many of them have effects that look like the effects
of trade policy changes, this section undertakes a review of significant
changes in U.S. economic structure over the last three decades.
Particular attention is paid to those economic changes with a plausible link
to trade policy changes. Theories of international trade6 suggest that a policy of
reducing trade barriers should have the following effects: 1) the share of U.S.
output produced by exporting industries should increase and the share of U.S.
output produced by import-competing industries should decrease, 2) average
real incomes should rise, as the shift toward exporting sectors increases the
value of U.S. output, and 3) the relative rate of return paid to factors of
production will shift in favor of those resources employed more intensively in
exporting industries and against those factors employed more intensively in
import-competing industries.7 All of these changes occurred between 1974 and
2001. This chapter reviews the historical changes in the economic variables of
primary interest to trade policy makers, and identifies other changes in the U.S.
economy that might have also contributed to observed outcomes.
Structure of U.S. Economy
The United States has seen considerable changes in the composition of
output since the mid-1970s. At the broad level, production has shifted away
from manufacturing, mining and agriculture, and toward services. Table 3-1
shows real gross domestic product (measured in 1996 dollars) and the share of
6 The international trade models described here are those based on the concept of
comparative advantage -- the Ricardian and Heckscher--Ohlin models. For a discussion
of these models, see for example, chapters 2 and 4 in Paul R. Krugman and Maurice
Obstfeld, International Economics: Theory and Policy, Sixth Edition, (Boston: Addison
Wesley, 2002).
7 U.S. output is capital-- and skill--intensive, relative to the rest of the world. In 1993,
the United States had an estimated 19.4 percent of the world’s skilled labor, 20.8 percent
of the physical capital, and 2.6 percent of the unskilled labor. See William Cline, Trade
and Income Distribution (Washington, D.C.: Institute for International Economics,1997),
p.183. Donald Davis and David Weinstein, “An Account of Global Factor Trade,”
American Economic Review, vol. 91, No. 5, December 2001, pp. 1423--1453 found that
U.S. production is more capital intensive than any other country in their sample. Given
that the U.S. economy uses unskilled labor less intensively than the rest of the world, the
Heckscher--Ohlin model (specifically, the Stolper--Samuelson theorem) of international
trade suggests that more open trade policies should lead to a relative decline in the return
to unskilled labor in the United States. The Heckscher--Ohlin model is reviewed in
greater detail in the chapter 4 discussion of the effect of trade on the distribution of
wages.
40
Table 3-1
Gross domestic product by industry sector
1974
Value
Agriculture2 . . . . .
Mining . . . . . . . . .
Manufacturing . .
Services3 . . . . . .
Government . . . .
Statistical
discrepancy . .
Share of
total
2001
Value
Share of
total
Million
dollars 1
Percent
Million
dollars 1
Percent
145,369
101,411
920,612
2,290,841
613,465
3.5
2.5
22.5
55.9
15.0
128,541
127,070
1,300,484
6,594,216
1,171,017
1.4
1.4
14.1
71.6
12.7
27,182
0.6
(107,156)
-1.2
Total . . . . . . .
4,098,880
100.0
9,214,176
100.0
1 Chain--weighted 1996 dollars, deflated with real GDP deflator calculated
from Bureau of Economic Analysis data.
2 Includes Agriculture, Forestry and Fishing sectors.
3 Includes Construction, Transportation and Communications, Wholesale
Trade, Retail Trade, Finance, Insurance and Real Estate, and Services
sectors.
Source: Bureau of Economic Analysis and staff calculations.
the total in each of the four aggregate sectors for 1974 and 2001. Every
sector but agriculture has grown in absolute size. Only the services sector has
increased its share of total U.S. GDP.
The most significant change in table 3-1 is the relative increase in services’
share of output and the relative decrease in the manufacturing share of output.
In discussions of trade policy, it is often asserted that trade policy changes are
responsible for the relative decline of the manufacturing sector.8 Since the
United States is a net exporter of services and a net importer of manufactured
goods, standard trade models would suggest that reductions in trade barriers
would lead to some shift of U.S. production toward services and away from
manufacturing. However, it is not clear that trade policy changes were large
enough to cause a significant shift of resources from manufacturing to the
8
See, for example, Robert E. Scott, “Fast Track to Lost Jobs: Trade Deficits and
Manufacturing Decline are the Legacy of NAFTA and the WTO,” Economic Policy
Institute Briefing Paper, downloaded from
http://www.epinet.org/briefingpapers/118/bp118.pdf on March 18, 2003.
41
service sector. A number of other significant changes have occurred that
might also have contributed to the shift of U.S. output toward services,
including increased relative preferences for services by households and firms,
rapid productivity growth in manufacturing, and the deregulation of several
large services industries.
There is considerable evidence that consumers allocate a larger share of
income toward services as their incomes rise. In an earlier assessment of
cross-country demand patterns, the Commission found that the share of
national income devoted to consumption of services increases with a country’s
per capita income.9 The Commission also found that, for countries with a high
per capita GDP, the share of national income devoted to consumption of
manufactured goods falls as income increases. Since the United States has a
relatively high per capita GDP, this analysis suggests that growth in U.S. per
capita GDP since 1974 should have increased services’ share of household
demand, and decreased the manufacturing share of household demand.10
Much as the Commission’s earlier analysis suggested, economic growth in
the United States has coincided with an increase in the consumption share of
services and a decrease in the consumption share of manufactured goods. U.S.
per capita GDP increased substantially over the period, from $19,163 in 1974
to $32,352 in 2001.11 During that time, services’ share of personal
consumption expenditures went from 45.5 percent to 58.8 percent.12
Meanwhile, manufactured goods’ share of consumption expenditures fell from
28.0 percent to 24.4 percent.13 One significant reason that U.S. production has
9
USITC, The Dynamic Effects of Trade Liberalization: An Empirical Analysis,
Publication 3069, October 1997, Washington, DC.
10 For further evidence on the cross country relationship between services and
average income, see table 4.2, World Development Indicators 1999, World Bank,
Washington, DC, p.194. This evidence shows the share of services in production. The
share of services in consumption is highly correlated with the share of services in
production.
11 Measured in constant 1996 dollars. Data are from table 8--7 of USDOC, Bureau of
Economic Analysis,“National Income and Product Accounts”; downloaded from
http://www.bea.doc.gov/bea/dn/nipaweb/ on March 15, 2003.
12 Commission calculations based on table 1--1 of USDOC, Bureau of Economic
Analysis, “National Income and Product Accounts”; downloaded from
http://www.bea.doc.gov/bea/dn/nipaweb on March 21, 2003.
13 Commission calculations based on table 2--2 of USDOC, Bureau of Economic
Analysis, “National Income and Product Accounts”; downloaded from
http://www.bea.doc.gov/bea/dn/nipaweb on March 21, 2003. Reported shares are
calculated from personal expenditures on durable goods plus non--durable goods, except
food and energy. The National Income and Product Accounts do not isolate
manufacturing activity in the food and energy sectors. Food processing and energy
refining activities are grouped with agriculture and mining sectors, respectively. The
figures here exclude food and energy sectors to avoid including non--manufacturing
activities in the measures.
42
shifted toward services is that households have shifted their consumption
patterns toward services over time.
Firms have also shifted demand toward services over time. In 1977, 40.7
percent of economywide expenditures on intermediates went to services; in
1999, 57.9 percent of intermediate input expenditures went to services.14 Some
part of the increased industrial demand for services can be attributed to the
overall change in output–a growing services sector demands more services.15
Even the manufacturing sector has become more dependent on service inputs
over time.16 Some part of this shift can be attributed to domestic outsourcing
and related changes in industry employment practices. For example, workers
employed by a temporary service have their employment and value added
attributed to the service sector, even if their work involves manufacturing
activities.17 Management consulting activities are also attributed to the services
sector; these activities would be counted in manufacturing if a manufacturing
firm employed the consultants directly.
A second source of significant structural change has been the sizable
change in the oversight of service sectors. Many large service sectors,
including banking, transportation, communications, and energy services,
experienced significant deregulation during this period. Historical assessments
suggest that liberalized sectors experienced price declines of between 25 and
14 Commission calculations based on the 1999 U.S. input--output table from
USDOC, Bureau of Economic Analysis; data downloaded from
http://www.bea.gov/bea/industry/iotables/prod/table_list.cfm?anon=65#Tables on March
24, 2003. The 1977 data obtained from Bureau of Economic Analysis staff interviews.
15 A total of 74.2 percent of service industries’ expenditure on intermediates goes to
other service industries, and 32 percent of manufacturing expenditures on intermediates
is spent on services. USITC calculations are based on the USDOC, Bureau of Economic
Analysis’ 1999 U.S. input--output table. Data are available at
http://www.bea.gov/bea/industry/iotables/prod/table_list.cfm?anon=65; downloaded
March 21, 2003.
16 In 1977, 22.8 percent of manufacturers’ intermediate expenditures were allocated
to services. In 1999, 32 percent of manufacturers intermediate expenditures were on
services. USITC calculations are based on the USDOC, Bureau of Economic Analysis’
input--output tables available at
http://www.bea.gov/bea/industry/iotables/prod/table_list.cfm?anon=65; downloaded
March 21, 2003.
17 Segal and Sullivan estimate that employees of temporary services firms account
for 4.5 percent of all manufacturing employment. See Lewis M. Segal and Daniel G
Sullivan, 1997, “The Growth of Temporary Services Work,” Journal of Economic
Perspectives vol. 11, 2, p 122.
43
75 percent.18 Given the service sector’s relatively small exposure to trade,19
domestic deregulation probably had a more significant impact on the
historical experience of the service sector. Since service sectors account for
such a large share of output, the economywide impact of service sector
deregulation was likely larger than the impact of the five trade agreements.20
Perhaps the most significant change in the manufacturing sector during this
period has been the rapid increase in manufacturing productivity.21 Figure 3-1
shows productivity indices for the manufacturing sector and for the total
business sector, which includes manufacturing as well as all other private
sector output, particularly services. Output per hour in the manufacturing sector
increased 132 percent between 1974 and 2001. The broader business sector saw
output per hour rise by only 69 percent over the same period. Manufacturing
productivity increases have allowed total manufacturing output and value added
to increase, even as manufacturing employment has fallen. Table 3-2 reports
employment shares by industry for 1974 and 2001.
There have also been significant changes in the composition of output
within the broad sectors just described. Table 3-3 reports changes in value
added by manufacturing sector since 1977.22 A sector’s value added is its
18 Clifford Winston, “U.S. Industry Adjustment to Economic Deregulation,” Journal
of Economic Perspectives, vol. 12, No. 3, Summer 1998, p.98. Significant price declines
in the service sector would only increase the share of services expenditure if consumer
demand for services is elastic. That is, if a 1 percent price decline induces consumers to
increase their consumption of services by more than one percent, price declines
associated with deregulation would increase the share of services in consumers’ budgets.
19 In 2001, services accounted for 71.6 percent of output, 27.6 percent of exports
and 14.9 percent of imports.
20 Winston (1998) cites conservative estimates of the net benefits from the
deregulation of inter--city transportation, such as airlines, railroads and motor carriers,
which indicate deregulation of these sectors produced net benefits of $50 billion in 1996
dollars. The estimate in chapter 7 attributes a welfare gain of $56 billion to the five trade
agreements. Since services deregulation also included sizable sectors not included in
Winston’s estimate (i.e. telecommunications, banking, natural gas and electricity), the
impact of services deregulation was almost certainly larger than the impact of the five
agreements.
21 There is some evidence that increased trade, particularly increased imports,
contributed to the growth in U.S. manufacturing productivity. This evidence is reviewed
in chapter 4. Technological changes, increased capital intensity and increased skill levels
of U.S. workers may also have played a role. The relative importance of various sources
of productivity growth is considered in further detail later in this chapter.
22 Data were not available for years prior to 1977. The Standard Industrial
Classification (SIC) data system was revised in 1987, so it is difficult to summarize some
of the industry experiences over the entire period.
44
Figure 3-1
Output per hour in manufacturing and business sectors, 1974-2002
(1974=100)
240
220
Manufacturing
200
180
160
Business sector
140
120
100
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Source: Bureau of Labor Statistics and USITC calculations.
Table 3-2
Employment by industry sector
1974
2001
FTE1
Share of
total
FTE1
Share of
total
Thousands
Percent
Thousands
Agriculture2 . . . . .
Mining . . . . . . . . .
Manufacturing . .
Services3 . . . . . .
Government . . . .
1,458
685
19,538
40,324
15,158
1.9
0.9
25.3
52.2
19.6
2,085
556
17,319
85,464
19,445
1.7
0.4
13.9
68.4
15.6
Total . . . . . . .
77,163
100.0
124,959
100.0
1
Full time equivalent workers.
Includes agriculture, forestry and fishing sectors.
3 Includes construction, transportation and communications, wholesale
trade, retail trade, finance, insurance and real estate, and service sectors.
2
Source: Bureau of Economic Analysis and staff calculations.
45
Table 3-3
Changes in value added1 by manufacturing sector, 1977-2000
1977-87 1987-2000 1977-2000
Gross domestic product . . . . . . . . . . . . . . . . . .
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . .
35.5
33.0
Percent
50.9
52.4
104.4
102.7
Durable goods . . . . . . . . . . . . . . . . . . . . . . . .
Machinery, except electrical . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . .
Miscellaneous manufacturing industries
Fabricated metal products . . . . . . . . . . . .
Lumber and wood products . . . . . . . . . . .
Motor vehicles and equipment . . . . . . . .
Primary metal industries . . . . . . . . . . . . . .
Stone, clay, and glass products . . . . . . .
Electric and electronic equipment . . . . . .
Other transportation equipment . . . . . . .
Instruments and related products . . . . . .
Nondurable goods . . . . . . . . . . . . . . . . . . . . .
Rubber and miscellaneous plastics
products . . . . . . . . . . . . . . . . . . . . . . . . .
Chemicals and allied products . . . . . . . .
Petroleum and coal products . . . . . . . . . .
Food and kindred products . . . . . . . . . . .
Textile mill products . . . . . . . . . . . . . . . . .
Paper and allied products . . . . . . . . . . . .
Printing and publishing . . . . . . . . . . . . . . .
Apparel and other textile products . . . . .
Leather and leather products . . . . . . . . .
Tobacco products . . . . . . . . . . . . . . . . . . .
32.1
84.6
33.0
17.0
17.1
42.2
-12.8
-27.9
-5.0
(2)
50.6
(2)
34.3
91.1
221.4
26.9
40.7
28.8
-12.7
36.5
35.2
49.2
507.3
-27.6
-20.6
12.1
151.9
501.4
68.8
64.6
51.0
25.8
19.0
-2.5
(2)
(2 )
(2)
(2 )
51.0
67.4
33.8
127.6
49.3
23.9
20.5
25.1
20.8
-21.6
-56.3
101.8
51.6
-12.2
13.4
9.3
-2.7
-16.4
-14.7
-24.2
-72.5
253.1
102.9
99.8
69.4
35.4
16.7
4.6
3.0
-40.5
-88.0
1
Value added is a measure of industry size. A sector’s value added is its
contribution to GDP.
2 Due to the change in SIC classification in 1987, data for this period are not
available.
Source: Bureau of Economic Analysis.
46
contribution to GDP.23 Growth in manufacturing value added has been most
rapid in machinery, electronic equipment, and rubber and plastic products.
Total value added in primary metal industries, tobacco products, and leather
products has fallen. As with the broader sectoral classifications discussed
above, there are a number of reasons why sectors might grow at differing
rates, including changes in relative demands, technical change, and changes
in trade patterns. Specific industry experiences are discussed in greater detail
in chapter 5.
Cross-industry Reallocation and Frictional
Unemployment
Changes in the composition of output may require productive resources to
move from the sectors in relative decline to the sectors that are experiencing
relative growth. The reallocation of resources across sectors can produce
unemployment of inputs in the short- to medium-term.24 For example, workers
displaced from a shrinking sector may not have the appropriate skills to find
jobs in growing sectors. Even if their skills are appropriate for work in growing
sectors, workers leaving shrinking sectors may require some time to identify
other jobs for which they are qualified.25 Unemployment associated with the
movement of resources between sectors is called “frictional” unemployment.26
Unemployment may also arise because macroeconomic fluctuations lead
firms to require less labor during recessions or periods of slower economic
growth. Fluctuations in the macroeconomy cause changes in the level of
cyclical unemployment. When GDP is growing rapidly, cyclical unemployment
falls. When GDP is falling (or growing slowly) cyclical unemployment rises.
23 Sector value added is the difference between a sector’s sales and its cost of
materials. As the portion of revenues not allocated to materials, sector value added
represents income earned by one or more factors of production.
24 Many international trade models abstract from frictional unemployment
associated with the movement of resources between sectors. For a theoretical perspective
on trade, the movement of labor between sectors, and frictional unemployment, see Carl
Davidson and Steven J. Matusz, 2000, “Globalization and Labour--Market Adjustment:
How Fast and at What Cost?” Oxford Review of Economic Policy, vol. 16, No. 3, pp
42--56.
25 Some discussions of unemployment distinguish structural unemployment (the
unemployed worker’s skills are not appropriate for any available job) and frictional
unemployment (the unemployed worker’s skills are appropriate for a job that exists, the
worker has simply not found that job yet). For the purposes of this discussion frictional
unemployment is intended to include both types of unemployment.
26
The phenomenon is not constrained to labor adjustment. Changes in the
composition of output may also lead sector--specific capital to go unused.
47
This section documents fluctuations in the unemployment rate since 1974,
and provides some context as to the relative importance of frictional and
cyclical causes for fluctuations in the unemployment rate.
Figure 3-2 shows the U.S. civilian unemployment rate and changes in the
real gross domestic product from 1974 to 2002, overlaid with the
implementation dates of the five agreements of interest. Fluctuations in the
measured unemployment rate appear to be driven by cyclical changes in GDP
because increases in the unemployment rate generally coincide with recessions,
and reductions in unemployment coincide with sustained economic growth.
Figure 3-2
U.S. Civilian Unemployment rate, changes in real GDP and
implementation dates of significant U.S. trade agreements,
1974-2001
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, USITC
calculations.
48
48
Statements linking employment levels with the trade balance emerge
frequently in public policy debate.27 However, a historical review of U.S. trade
deficit and unemployment figures suggests that periods of increased trade
deficits have been associated with low unemployment, and vice versa. Like the
unemployment rate, changes in the trade balance are primarily driven by
changes in macroeconomic circumstances. Periods of strong economic growth
fuel increasing demand for all goods, including imported products, increasing
the demand for labor and reducing unemployment.28 Figure 3-3 shows that
cyclical increases in the trade deficit are typically associated with decreases in
the unemployment rate.
Post-employment Experiences of Displaced Workers
While there do not appear to have been structural changes in the
unemployment rate over the period, one topic of interest to policy makers is
the experience of workers who are displaced as a result of economic change. A
growing body of research explores information contained in the Displaced
Worker Survey, which reports the characteristics and experiences of workers
whose job losses are due to a plant closing, an employer going out of business,
or a layoff from which he/she was not recalled.29 These figures count the
number of workers who lost their jobs in a particular manner. They are not a
measure of economywide employment. The primary reason for collecting
27 See, for example, Robert E. Scott, “NAFTA’s Hidden Costs,” in NAFTA at Seven
(Washington, DC: Economic Policy Institute, 2001), p. 3, and Gary C. Hufbauer and
Jeffrey J. Schott, NAFTA: An Assessment (Washington, D.C.: Institute for International
Economics, 1993), p.14. Scott argues that an increase in the U.S. bilateral trade deficits
with Canada and Mexico of $46.2 billion induced 766,030 actual and potential lost jobs.
Hufbauer and Schott use a similar methodology in a forward--looking evaluation of
NAFTA. They assume that NAFTA would reduce the trade deficit, and attribute 170,000
new jobs to NAFTA. Trade--deficit--driven “job--counting” exercises do not take into
account the ability of trade policy changes to affect the relative price of inputs, nor do
they consider behavioral responses to relative price change.
28 The trade deficit has grown over time, from 0.3 percent of GDP in 1974 to 3.6
percent of GDP in 2001. International economists attribute growth in the trade deficit to
increased U.S. borrowing on international financial markets. Because U.S. national
savings have not kept pace with the borrowing requirements of U.S. households, firms
and governments, the United States has become a net borrower from the rest of the
world. An accounting identity equates the current account deficit (a broad measure of the
trade deficit) and the capital account surplus. In order to be a net borrower of
international assets, the U.S. must have a current account deficit. See Krugman and
Obstfeld, 2000, pp. 300--322.
29 The Displaced Worker Survey is a supplement to the Current Population Survey
collected by the U.S. Census Bureau on behalf of the Bureau of Labor Statistics. The
data are available at http://www.bls.census.gov/cps/dispwkr/sdata.htm.
49
Figure 3-3
U.S. unemployment rate and trade deficit
10
8
Unemployment Rate
6
4
Trade Deficit (% of GDP)
2
0
--2
1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, and U.S.
Census Bureau - Foreign Trade Division.
such data is to better understand the experiences of those “individuals with
established work histories, involuntarily separated from their jobs by mass
layoff or plant closure (rather than because of individual job performance),
who have little chance of being recalled to jobs with their old employer.”30
Kletzer estimates that, by this definition, approximately 17 million workers
were displaced from a manufacturing job during the period 1979 to 1999.31
30 Lori G. Kletzer, “Job Displacement,” Journal of Economic Perspectives, vol. 12,
No. 1, Winter 1998, p 116.
31 Lori G. Kletzer, Job Loss from Imports: Measuring the Costs, (Washington, D.C.:
Institute for International Economics, September 2001).
50
Assessments of Displaced Worker Survey data suggest that displacements
are strongly cyclical, with job loss rates rising in recessions and falling in
expansions.32 Displaced workers report longer periods of unemployment than
workers who are laid off from jobs in which they expect to be reemployed.33
Farber finds that over the period 1981-1995, post-displacement earnings were
13 percent lower than pre-displacement earnings. Earnings losses were not
uniform across all displaced workers– approximately one-third of displaced
workers report earnings losses of 25 percent or more, whereas 30 to 40 percent
report earning more in their post-displacement job than on their
pre-displacement job.34 A study of tax returns from Pennsylvania found that 4
years after displacement, displaced workers earned $2000 per quarter less than
equivalent workers that were not displaced.35 Kletzer cautions that data from
Pennsylvania, a traditional industrial state, may not be representative.36
A significant reason for earnings losses is the inability of displaced workers
to find full-time employment.37 The evidence also suggests that the probability
of unemployment is associated with various characteristics of displaced
workers. Farber finds that those without a college degree, women, and
minorities are at a disadvantage in finding subsequent employment.38 Kletzer
cites a number of papers that find that “the post-displacement earnings of those
who change industry are lower than the earnings of comparable individuals
who stay in the same industry.”39 Chapter 4 presents evidence that the
post-displacement experiences of workers displaced from sectors with large
import shares are reasonably similar to the experiences of other workers
displaced from manufacturing overall.
Economic Growth and Productivity
The U.S. economy has experienced substantial growth since 1974. In that
year, real GDP was $4.1 trillion; by 2001 it was $9.2 trillion.40 This change
32
Kletzer, 1998, p. 117.
Ibid., p. 121.
34 Henry S. Farber, 1997, “The Changing Face of Job Loss in the United States,”
Industrial Relations Section Working Paper 382, Princeton University, cited in Kletzer,
1998, p. 123.
35 Louis S. Jacobson, Robert J. LaLonde, and Daniel G. Sullivan, The Costs of
Worker Dislocation (Kalamazoo, MI: W.E. Upjohn Institute for Employment Research,
1993), pp. 124--126, cited in Kletzer, 1998.
36 Kletzer, 1998, p. 126.
37 Ibid., p. 124.
38 Farber 1997, cited in Kletzer 1998, p.123.
39 Kletzer, 1998, p. 129.
40 Measured in 1996 chain--weighted dollars. USDOC, Bureau of Economic
Analysis, “Survey of Current Business,” August 2002.
33
51
represents a 3 percent average annual growth rate over the period.41 The
simplest models of economic growth suggest a number of reasons for growth
in real GDP since 1974.42 Population growth and higher work force
participation rates have produced a much larger labor supply and growing
employment. The American labor supply also has become more productive
because current workers are better educated than workers in the 1970s.
Another source of economic growth and increased labor productivity has
been substantial growth in the capital stock. Finally, there is evidence that
inputs are being combined more efficiently than they were in the past, as
measures of total factor productivity have also risen. Each of these sources of
growth is discussed in more detail in the next section.
Growth in Factor Inputs
One important reason U.S. GDP has risen since 1974 has been the
substantial growth in the supply of labor.43 In 1974, total nonfarm employment
in the United States was 78.3 million; by 2001, it had reached 131.9 million, a
68 percent increase.44 One reason for labor force growth has been growth in
the U.S. population, from 213.8 million45 in 1974 to 277.8 million46 in 2001, a
30 percent increase.47 The labor supply is also larger because labor force
participation rates have grown, from 61.3 percent in January 1974 to 66.8
percent in December 2001.48 Female labor force participation rates have grown
even faster, from 45.1 to 60.0 percent over the same period.49
41
Commission calculations.
For an introduction to models of economic growth, see Robert Barro and Xavier
Sala-i-Martin, Economic Growth (New York: McGraw--Hill Inc., 1995). The sources of
growth identified in this paragraph are consistent with the model proposed in N. Gregory
Mankiw, David Romer and David N. Weil, “A Contribution to the Empirics of Economic
Growth,” Quarterly Journal of Economics, vol. 107, No. 2 May, pp. 407--437.
43 Discussions of macroeconomic fluctuations often attribute growth in employment
to growing GDP. Since this discussion focuses on sources of long run growth in GDP, it
treats GDP growth as an outcome of a growing labor supply. This treatment is consistent
with the literature on long--run economic growth.
44 U.S. Bureau of labor statistics. Found at internet address
http://data.bls.gov/cgi-- bin/surveymost?ee, retrieved Jan. 16, 2003.
45 U.S. Census Bureau. Found at Internet address
http://eire.census.gov/popest/archives/pre1980/popclockest.txt, retrieved Jan. 16, 2003
46 U.S. Census Bureau projection. Found at internet address
http://www.census.gov/population/projections/nation/summary/np--t1.pdf.
Retrieved Jan. 16, 2003.
47 Commission calculation.
48 Civilian labor force participation rate, U.S. Department of Labor (USDOL),
Bureau of Labor Statistics. Found at Internet address http://www.bls.gov/cps/home.htm,
retrieved Jan. 16, 2003.
49 Ibid.
42
52
A second source of GDP growth has been growth in the stock of
capital–the machinery, equipment, factories, infrastructure, and other
investment goods that make future production possible. In 2001, the total value
of private fixed assets (measured in current dollars) was $22.1 trillion, a 109
percent increase in real terms from 1974.50 The capital stock is the
accumulated value of past investment, net of depreciation. Gross private
domestic investment as a share of GDP has risen over the period, from 13.7
percent in 1974 to 17.1 percent in 2001.51
Productivity Measures and Changes in
Productivity
While increases in labor supply and the capital stock have been important,
another component of economic growth has been improvements in the overall
efficiency of U.S. production. In the discussion of sectoral experiences, it was
noted that output per hour had increased over the period, especially in the
manufacturing sector. The “output per hour”measure, also known as “labor
productivity,” is the most straightforward measure of productivity growth.
However, as the broadest measure of productivity, the labor productivity
measure commingles several sources of productivity growth.
Labor productivity in the private business sector increased by 69 percent
between 1974 and 2001, while labor productivity in the narrower
manufacturing sector increased by 132 percent. While labor productivity is the
broadest and most easily understood measure of productivity, it does not
differentiate between various sources of productivity growth. Growth in labor
productivity only indicates that output is growing faster than employment.
A significant contributor to labor productivity growth has been growth in
the capital intensity of production. As noted, the capital stock grew by 109
percent between 1974 and 2001, while employment grew by 69 percent. These
differential rates of growth imply that the amount of capital per worker (the
capital intensity of production) has increased.
For many purposes, economists wish to distinguish between increased
capital intensity and other sources of productivity change. The primary measure
of productivity used in the studies reviewed next is total-factor productivity
50 Measured by chain--weighted quantity index (1996=100) of net fixed assets in the
United States. Figures are net of depreciation, meaning that the capital stock does not
include machinery or equipment that has outlived its own productive life ( worn out).
USDOC, Bureau of Economic Analysis, “National Incomes and Product Accounts,”
tables 2.1 and 2.2, found at Internet address
http://www.bea.gov/bea/dn/faweb/AllFATables.asp, retrieved Jan. 16, 2003.
51 Commission calculations based on data from USDOC, Bureau of Economic
Analysis, “National Incomes and Product Accounts, found at internet address
http://www.bea.gov/bea/dn/nipaweb/index.asp, retrieved Jan. 16, 2003.
53
(TFP), which measures those changes in U.S. output that cannot be explained
by growth in the labor supply and capital stock.52 TFP is a residual measure,
with some portion of real GDP growth attributed to growth in the capital
stock and the labor supply; and the remaining growth attributed to TFP.
Increases in TFP can be attributed to technological change, education,
efficiency improvements, returns to scale, reallocation of resources, and other
factors. Increases in TFP may have been influenced by growing international
trade.
TFP has been an important source of economic growth in the past few
decades. The U.S. Department of Labor’s Bureau of Labor Statistics
calculations indicate that TFP in the private business sector rose by 24.5
percent between 1974 and 2000.53 This calculation suggests that even had the
size of the labor force and capital stock remained constant, private business
sector output would have risen by 24.5 percent simply because existing capital
and labor are now combined more efficiently than they were in 1974. TFP has
grown even faster in the manufacturing sector–a 35.7 percent increase from
1974 to 2000.54
One important component of TFP is human capital, the set of knowledge,
skills, and experience embodied in the labor force. Education statistics are
thought to be an indicative measure of the economywide stock of human
capital. The U.S. labor force is better educated than it was in 1974. At that
time, 61.2 percent of Americans over the age of 25 had completed 4 years of
high school, and 13.3 percent had completed 4 years of college. By 2000, the
number of Americans over 25 years of age who completed 4 years of high
school had risen to 84.1 and those that had completed 4 years of college rose to
52 For more on TFP, also known as multifactor productivity, see USDOL, Bureau of
Labor Statistics,. “Why is Multi--factor productivity important?” Found at Internet
address http://wwwbls.gov, retrieved Oct. 16, 2002.
53 Commission calculations based on data from USDOL, Bureau of Labor Statistics.
Data available at http://www.bls.gov/news.release/prod3.t01.htm, retrieved Jan. 16, 2003.
54 Commission calculations based on data from USDOL, Bureau of Labor Statistics.
Data available at http://www.bls.gov/news.release/prod5.t01.htm, retrieved Jan. 16, 2003.
Measures of manufacturing productivity also account for changes in the prices of
materials and energy, since these are significant inputs into manufacturing activities. For
a detailed explanation of methods used to measure productivity in manufacturing, see
William Gullickson, “Measurement of productivity growth in manufacturing,” Monthly
Labor Review, July 1995, available at http://www.bls.gov/opub/mlr/1995/07/art2full.pdf.
One reason such adjustments are necessary for the years 1974--2001 is the fall in the real
price of energy. Refiners’ crude oil acquisition costs (measured in 1996 dollars) were
$24.77 per barrel of oil in 1974. By 2001, they had fallen to $20.77 per barrel. See U.S.
Energy Information Administration data available at
http://www.eia.doe.gov/emeu/aer/pdf/pages/sec5--201.pdf.
54
25.6 percent.55 These figures suggest a substantial increase since 1974 in the
human capital embodied in the U.S. work force.56
Some measures of TFP growth separate the effects of changes in human
capital from other sources of TFP growth. Table 3-4 provides Bureau of Labor
Statistics estimates of labor productivity growth for various time periods
relevant to this study. Labor productivity grew most quickly in the 1995 to
2000 period, at a 2.7 percent annual rate. Growth in labor productivity is
decomposed into three parts–increased capital intensity, changes in labor
composition (including human capital), and total factor productivity.
Table 3-4
Contributions of labor, capital, and productivity to U.S. private
non-farm business output per hour
(Percent average annual growth rates)
19731979
19791990
19901995
19952000
Output per hour of all persons . . . . . .
Contribution of capital intensity . . .
Contribution of labor
composition . . . . . . . . . . . . . . . . .
1.3
0.7
1.6
0.8
1.5
0.5
2.7
1.1
0
0.3
0.4
0.3
Total factor productivity . . . . .
0.6
0.5
0.6
1.4
Source: “Multifactor Productivity Trends, 2000,” Bureau of Labor Statistics.
Possible Sources of Output and Productivity
Growth
The literature review in chapter 4 considers two types of interactions
between trade and technological change. Studies of the relationship between
increased trade and increasing wage inequality usually note that certain kinds
of productivity growth have economic effects similar to those of increased
55 U.S. Census Bureau. Found at Internet address
http://www.census.gov/population/socdemo/education/tableA-- 2.txt, retrieved Jan. 16,
2003.
56 Another potential contributor to human capital is the work experience of the labor
force. In recent years, as the baby boom generation has aged, the measured experience of
the U.S. work force has increased considerably. See “Changes in the Composition of
Labor for BLS Multifactor Productivity Measures, 1999,” USDOL, Bureau of Labor
Statistics, found at Internet address http://www.bls.gov/mfp/mprlabor.pdf, downloaded
March 24, 2003.
55
trade.57 Other studies explore the possibility that more open trade contributes
to faster productivity growth. If increased international trade contributes to
productivity growth, some of the effects of technological change can be
attributed to trade and trade policy. This chapter explores sources of
productivity growth that are not directly associated with trade.
A growing body of literature considers the effects of technical innovation
in information technology sectors58 during a time period that roughly coincides
with years in which the trade agreements of interest were enacted. Recent
research has paid special attention to the role of information technology as a
source of productivity growth. There is some disagreement about the degree to
which information technology has had broad economywide effects on
productivity. Some authors attribute significant economywide changes in
measures of productivity to information technology.59 Others argue that the
productivity-enhancing effects of information technology have largely been
limited to durable goods manufacturing sectors.60 Evidence of substantial
technological change suggests that it is a significant source of economic
change, particularly in manufacturing, and warrants discussion as a plausible
alternative to trade growth in explaining various economic outcomes.
Changes in the Distribution of Wages
Across Measures of Skill
One topic of concern to trade policy makers and empirical economists has
been the growing gap between the wages paid to skilled and unskilled labor.
Economic research reviewed in chapter 4 suggests that growing international
trade has contributed to growth in the skilled wage premium, though other
factors like technological change appear to be more important. There are a
number of measurement issues that complicate efforts to determine the effects
of trade and other causes on the skilled wage premium. This section reviews
the relevant measurement issues, describes the historical experience of the
wage distribution since the mid-1970s, and reviews those sources of economic
change that might have contributed to a growing skill-premium.
57
Technological progress that increases the productivity of one input relative to
another can either magnify or offset the impact of trade on the returns to the owners of
each input. In the following discussion, skill--augmenting technological change is the
most relevant kind of productivity growth. One example of skill augmenting
technological change is the introduction of new technologies that increase the
58 Authors sometimes differ in the sectors considered to be information technology
sectors. productivity of skilled workers more than they increase the productivity of
unskilled workers.
59 Dale Jorgenson, “Information Technology and the U.S. Economy,” American
Economic Review, vol. 91, No. 1, 2001, pp. 1--32. Jorgenson defines information
technology as computers, communications equipment and software.
60 Robert J. Gordon, “Does the New Economy Measure Up to the Great Inventions
of the Past?” Journal of Economic Perspectives, vol. 14, No. 4, 2000, pp 49--74.
56
Measuring the Premium Paid to Skilled Labor
A number of measurement issues complicate efforts to understand changes
in the level and distribution of labor compensation over time. Rising health
insurance costs and the introduction and growth of other nonwage benefits
make wage data imperfect indicators of changes in total labor compensation.
Relative price changes, increased quality and the introduction of new goods
complicate efforts to adjust wage growth for changes in inflation. Difficulties
in measuring skill also make it difficult to measure the relationship between
skill and wages.
More than one-fourth of total labor compensation payments are made in the
form of nonwage benefits such as health insurance premiums, retirement
benefits, and paid leave.61 Given the importance of nonwage payments, studies
of changes in the distribution of labor compensation should also account for
changes in nonwage benefits. Unfortunately, data on total labor compensation
payments are not always available for skill categories and the time periods for
which economic analysis is needed. Studies that use wage data tend to
underestimate growth in labor compensation over time, leaving out growth in
non-wage benefits.
A second complication in measuring labor payments over time is
identifying appropriate measures of inflation. Figure 3-4 shows how the
measurement issues complicate efforts to determine how real wages have
changed over time. The figure shows three series: nominal wages and salaries
deflated by growth in the consumer price index (CPI), nominal total
compensation deflated by growth in the CPI, and nominal total compensation
deflated by the Bureau of Economic Analysis’s personal consumption
expenditures (PCE) price index.62 Based on the first series, one might conclude
that real wages had remained stagnant over most of the period considered.
Including growth in paid benefits, and deflating this measure by the PCE
index, one can conclude that total real payments to labor have grown by 20
percent since 1979.
61 In 1999, 27 percent of labor compensation went in the form of nonwage benefits.
See USDOL, Bureau of Labor Statistics, Employer Costs for Employee Compensation,
1986--1999, table 1, p.2. Downloaded from http://www.bls.gov/ncs/ect/sp/ecbl0013.pdf,
March 26, 2003.
62 The PCE index is suggested in Lawrence F. Katz and David H. Autor, “Changes
in the Wage Structure and Earnings Inequality,” Handbook of Labor Economics, vol. 3A,
(Amsterdam, The Netherlands: Elsevier, 1999) pp. 1463--1548. The more familiar CPI is
known to have a number of weaknesses that bias it upward as a measure of inflation. The
Boskin Commission estimated that upward biases in the CPI raise the estimated rate of
consumer price inflation by between 0.8 and 1.6 percent per year. U.S. Social Security
Administration, The Boskin Commission Report: Toward a More Accurate Measure of
the Cost of Living, December 1996, downloaded from
http://www.ssa.gov/history/reports/boskinrpt.html#cpi6 March 25, 2003.
57
Figure 3-4
Measures of Real Labor Compensation (1979=100)1
120
110
Total compensation -- PCE deflator
100
Total compensation -- CPI deflator
Wages and salaries - CPI deflator
90
1977
1 Total
1980
1983
1986
1989
1992
1995
1998
compensation data not available before 1979.
Source: USITC calculations based on Bureau of Labor Statistics and Bureau of
Economic Analysis data.
A third source of measurement difficulty arises in characterizing skill. Two
differences in worker characteristics receive much of the attention. Many
cross-industry studies relate differences in the wage/compensation payments to
the type of work. Workers are also often categorized by levels of educational
attainment.
Historical Experience
Much of the research on the relationship between international trade and
the distribution of wages stems from evidence summarized by Katz and Autor,
who provide a comprehensive review of the literature on wage distribution.63
Among their conclusions, Katz and Autor state:
63 Lawrence F. Katz and David H. Autor, “Changes in the Wage Structure and
Earnings Inequality,” Handbook of Labor Economics, vol. 3A, (Amsterdam, The
Netherlands: Elsevier, 1999) pp. 1463--1548.
58
1.
Wage dispersion increased substantially for both men and women from
the end of the 1970s to the mid-1990s. The weekly earnings of the 90th
percentile worker relative to the 10th percentile worker increased by
over 25 percent for both men and women from 1979 to 1995. The
available evidence suggests earnings inequality has expanded even
more dramatically if one includes the very top end (top 1 percent) of
the distribution. This pattern of rising wage inequality was not offset by
changes in nonwage compensation favoring the low-wage workers.
2.
Wage differentials by education, occupation and age (experience) have
increased. The relative earnings of college graduates and those with
advanced degrees increased dramatically in the 1980s. But the gender
differential declined both overall and for all age and education groups
in the 1980s and 1990s.
Evidence motivating these conclusions is presented here.
Figure 3-5 shows the time path of real earnings for production and
nonproduction workers in manufacturing, with earnings deflated by growth in
the PCE price index, for the years 1977 to 2000. Figure 3-5 shows that the
wages of those actually engaged in production have stayed relatively flat, while
earnings of workers in management and other nonproduction activities
(administrative work, factory maintenance) have risen. In 1977, nonproduction
workers earned 53.2 percent more than production workers. In 2000,
nonproduction workers earned a 77.7 percent premium over production
workers. Real earnings of nonproduction workers grew by 22.1 percent
between 1979 and 2000, while real earnings of production workers rose by
only 5.3 percent.64
Figure 3-6 shows the evolution of real mean annual earnings for workers
based on educational attainment, with earnings deflated by the BEA’s PCE
price index.65 All data points are normalized relative to the earnings of those
with a high school diploma in 1975. Those with a college degree earned 57
percent more than high school graduates in 1975, and by 1999 college
graduates earned 111 percent more. Those with a graduate degree earned 113
percent more than high school graduates in 1975, and 175 percent more in
1999.66
64 Commission calculations based on data from the U.S. Census Bureau’s “Annual
Survey of Manufactures, 2000,” and the Bureau of Economic Analysis’ PCE price index.
65
Earnings
data
are
taken
from
the
U.S.
Census
Bureau,
http://www.census.gov/population/socdemo/education/tableA-- 3.txt, downloaded March
26, 2003. Census also reports a series on earnings of workers with some college
education. These workers earned a 6 percent premium over high school graduates in
1975,and a 16 percent premium in 2001.
66 Commission calculations based on data from U.S. Census Bureau and Bureau of
Economic Analysis data.
59
Figure 3-5
Real production and non-production earnings in manufacturing,
1977--20001 (Production workers, 1977=100)
200
180
160
Non-production workers
140
120
100
Production workers
80
1977
1980
1983
1986
1989
1992
1995
1998
1 Deflated by chained price index for personal consumption expenditures.
Data classification changes make current earnings data incomparable with
pre-1977 data.
Source: Bureau of Labor Statistics and USITC calculations.
60
Figure 3-6
Real earnings by educational attainment, 1975-19991 (High School
diploma, 1975=100)
350
300
250
Advanced degree
200
College degree
150
High School diploma
100
No High School diploma
50
1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999
1
Deflated by chained price index for personal consumption expenditues.
Source: U.S. Census Bureau, Bureau of Economic Analysis, and USITC
calculations.
61
CHAPTER 4:
The Effects of Trade
Liberalization on the U.S.
Economy in Historical
Perspective:
A Literature Review
Overview
This chapter is devoted to providing a summary and overview of the
economic literature bearing on the question of whether or not the five
agreements in particular or U.S. trade liberalization policies in general have
had an observable and significant effect on U.S. economic activity from the
mid-1970s onward. The question can be viewed from a number of perspectives,
and the present review does not exhaust the literature that has been brought to
bear on the issue.
This literature review has three primary purposes. First, it seeks to draw out
any emerging consensus that may already exist on the economic impact of
recent trade liberalization, particularly liberalization affecting the United States.
Second, the review provides a motivating background for the new quantitative
analysis presented in chapters 6 through 8, particularly with regard to the
choice of problems addressed and methods employed. Third, the review
provides, to the extent feasible, a basis for comparison for the empirical
findings presented in chapters 6 through 8. Throughout this chapter, short
citations are provided for works referenced. A bibliography appears as
appendix E of this report, providing full citation information.
Types of Literature Reviewed
Evidence of the economic effects of trade liberalization falls into two broad
categories. The first section of the review looks at studies that examine one or
more of the five agreements explicitly. Studies of the particular agreements fall
into two categories–ex ante and ex post studies. Ex ante studies are usually
done prior to an agreement, generally in an attempt to contribute to the debate
about whether to enter into an agreement or how to formulate it, and they
63
usually involve simulation methods. Studies in this category typically produce
estimates of the change in economic welfare expected from an agreement, and
may also present estimated changes in expected trade flows. This review treats
as ex ante studies those that have publication dates after agreements have gone
into effect, but that use simulation methods and data of a type indicating they
could have been executed ex ante. Ex post studies consist of attempts to
determine, after an agreement has gone into effect, whether or not it has had an
economic impact by utilizing data from the post-agreement period.
The second section of the review looks at studies that examine the
economic effects of increasing exposure to trade, or increasingly liberalized
trade policies, on one or more economic variables without reference to a
particular agreement. This body of literature examines the relationship between
trade liberalization and economic growth and productivity, looking at the role
of trade liberalization for wages, employment and income distribution, and has
begun to address the extent to which trade liberalization increases the variety
of goods available to firms and consumers.1
Methodologies Employed In The Literature
While the methodological issues involved in each branch of literature will
be discussed more fully in those sections of the review, some general points are
in order here.
The ex ante studies of particular agreements use simulation methods, most
commonly computable general equilibrium (CGE) modeling. A CGE model
represents a national economy, or a world economy consisting of multiple
nations or regions. Each of these nations or regions consists of a certain
number of sectors or industries. The base data of the model represent the
economic situation in each region and sector as it existed in a particular base
year. The regions are connected to each other by international trade (exports
and imports), and sectors are connected to each other by supply and demand.
In other words, regions buy goods and services from one another, and a certain
part of their output is delivered to final demand or GDP and consumed by
households or governments, invested, or accounted for by international trade.
The interconnections among regions and sectors can be altered or disrupted by
various sorts of government policies. For example, the trade relationships can
be influenced by tariffs and nontariff measures, and the other markets by taxes
and subsidies.
1 The division between studies of particular agreements and studies addressing
general economic effects of trade liberalization is not always sharp. In cases in which a
study of a particular agreement also covers its effects on growth, productivity, labor
markets, or product variety, that study will be discussed either in the second section or in
both sections, as warranted.
64
A “run” or simulation of the CGE model consists of altering the policies of
interest. To ask, “What are the effects of NAFTA?” by this method means
approximately, “What would the base-year economy have looked like with the
pre-NAFTA trade barriers removed?” Advantages of the CGE approach
include the fact that it provides “controlled experiments” that isolate the effects
of policies of interest (because in the real world other things change besides
NAFTA), and that it disciplines the results obtained according to the logic of
economic theory. In addition, because all markets are interconnected, it is
possible to obtain estimates of the effect of changing one policy on any other
variable in the system, regardless of how small such effects might be.
Limitations of the approach arise from the inevitable simplifications
necessary to represent the complexities of the actual economy, even in a large
model, and from the data requirements needed to run larger models. The
models’ quantitative estimates are also sensitive to the choice of behavioral
parameters such as the elasticity of substitution–the parameter that measures
the degree to which buyers are willing and able to switch between varieties of
particular goods. Moreover, even when great care is taken to insure that a
simulation model is based on economic logic and calibrated to observable data,
experiments that validate the full structure of the model against historical
experience are difficult to perform.2
The ex post studies rely on a variety of econometric techniques and use
historical data. Particularly when these studies involve time-series data (e.g.
import or export data for 1970-2001, of which one asks the question whether,
for example, NAFTA made any difference from 1994 onward) the difficulty
faced by the researcher is that it is not possible to conduct pure “controlled”
experiments with historical data, because the data values from 1994 onward are
influenced not only by the presence of NAFTA, but by all other forces
influencing the economy during that period of time. Statistical techniques
attempting to sort out which of these forces are operating, and at what degree
of strength, may be more or less successful depending on whether actual
historical circumstances allow the “signal” of changing trade policy to be easily
separated from such other forces, or from the “noise” of purely unexplainable
fluctuations in the variables in question.
2 In a critique of the ex post validation experience with CGE models of NAFTA,
Kehoe (2002) made the case that models available to policymakers prior to the
implementation of NAFTA substantially understated NAFTA-induced increases in trade.
However, this finding does not per se indicate that the models are misspecified, since it is
well-understood that much of the growth in international trade in any historical period is
due to income growth, which may not be explicitly accounted for in a model that is
designed to isolate the economic effects of the trade agreement alone. Fox (2000)
showed that it was possible to do a good job of tracking historical changes in
U.S.-Canada trade after the U.S.-Canada FTA, using a CGE model which took account
of factors such as changes in the capital stock, labor supply, and total expenditure.
65
The ability to discern policy effects, in turn, depends on whether enough
time has passed to permit a statistically significant comparison between the
pre-agreement and post-agreement period. For these reasons, the ex post
studies are fewer in number, and are more recent in date. Nonetheless, such
work is attracting increasing effort on the part of economists, particularly
because policymakers inevitably wish to have information regarding the actual
effects of the policies they have just chosen, as well as advance estimates of
the effects of policies they are about to choose.
The research relating openness to trade and open trade policies to economic
growth, productivity, labor, and product variety, uses a wide variety of
statistical and econometric techniques that will be discussed in general terms in
the following sections, and in more detail in the underlying works cited.
Principal Findings
There is a broad consensus in the available literature on the following
results:
66
1.
Ex ante estimates of the effects on the United States of trade
liberalization arising from particular agreements generally have been
modest, on the order of less than 0.5 percent of GDP even for large
liberalizations like the Tokyo Round, NAFTA, and the Uruguay Round.
The estimated percentage increase in aggregate exports and imports is
usually greater than that for GDP. More than one agreement, in more
than one study, has been estimated ex ante to increase output in U.S.
agriculture and decrease it in textiles and apparel. This is consistent
with the significant prior degree of import restraints in foreign markets
for agriculture and the U.S. market for textiles and apparel,
respectively. The amount of information researchers have on the state
of play of multilateral negotiations influences the results they obtain.
Studies that obtain large estimates of the benefits of liberalization by
invoking scale economies may not be consistent with empirical
evidence obtained ex post, such as for the U.S.-Canada FTA.
2.
Econometric estimates of the effect of tariff reductions on trade suggest
that tariff reductions explain approximately 25 percent of the growth in
world trade. Other phenomena, notably reductions in the cost of air
transportation, appear to have been at least as important a source of
world trade growth. Foreign outsourcing also contributed to world trade
growth. A model that assumes that tariff reductions induce foreign
outsourcing attributes as much as one half of world trade growth to
tariff reductions.
3.
Available ex post estimates of the effect of NAFTA have found that the
NAFTA liberalizations have increased U.S.-Mexico trade in both
directions. While earlier studies had some difficulties identifying these
increases at all, improved methodologies and a longer post-NAFTA
time period have enabled them to be identified with increasing
precision, associating them with particular products that have now
benefitted from especially deep NAFTA tariff cuts.
4.
Openness to trade and more liberal trade policies are associated with
faster rates of economic growth both in the United States and abroad.
There have been many studies relating trade liberalization to rates of
economic growth across countries, and as their methodology has
improved, early skepticism about the robustness of the trade-growth
connection has diminished somewhat. It is easier to show a link
between economic growth and investment, which in turn may increase
as a result of trade liberalization.
5.
The available literature associating international trade and
productivity has mostly focused on the experience of developing
economies, though there are some relevant studies for the United
States. Foreign growth and productivity gains may influence U.S.
outcomes by increasing U.S. exports. Studies for both the United States
and other countries suggest a possible short-term relationship between
productivity and increased trade, but the direction of causation may
well be reversed (e.g. firms become productive first, and then export,
rather than vice versa). Evidence that exposure to trade causes industry
output to shift from less-productive to more-productive firms is
relatively strong, while evidence for a possible link between trading
opportunities and scale economies is sketchy at best. There is also some
industry-level evidence for higher rates of productivity growth in
industries exposed to import competition or trade policy liberalization.
6.
Since the 1970s, there has been a steady rise in the wages of
more-skilled U.S. workers relative to less-skilled U.S. workers.
Economic theory suggests that a possible cause for this is the increase
in U.S. imports from developing countries, relative to the U.S.
economy as a whole. A consensus of a wide range of studies, using a
variety of methods, is that at most 10-20 percent of the growth in the
“skilled wage premium” can be attributed to international trade, with
the rest most likely accounted for by technological change increasing
the demand for skilled labor. Evidence on the transition experiences of
workers affected by increasing imports, or in sectors influenced by
trade policy, suggests that their transitions from old to new jobs are not
markedly different in terms of wage changes or duration of
unemployment from other workers in the economy.
7.
Recent increases in trade in intermediate goods, known variously as
“outsourcing” or “production sharing,” may provide an additional
channel through which increases in trade may affect U.S. wages, as
less-skilled portions of vertically integrated production processes are
67
located overseas. Some estimates indicate that as much as 40 percent of
increases in the relative wages of nonproduction workers in the 1970s
and 1980s may be attributable to outsourcing, but these estimates do
not rule out the possibility that technological changes such as increased
computerization may have played an equally large or larger role.
8.
A significant portion of recent increases in international trade consists
of “new” goods, that is, goods coming from destinations that they did
not come from before. This is particularly true of the increase in U.S.
imports from Mexico post-NAFTA. It appears that such increases can
be linked to specific cuts in tariffs. Estimates for one developing
country suggest that as much as a third of the gains of trade
liberalization may be due to increased import product variety.
Economic Effects Attributed To
Particular Agreements Negotiated Under
Trade Promotion Authority
Simulation Analyses of U.S. Trade Policy
Changes
Comprehensive assessments of the economic impact of trade policy
changes often rely on models that simulate economic responses to changes in
trade policy in an environment that mimics observed economic relationships.
The primary relationships represented in simulation models of international
trade are the geographic trade pattern among nations and input-output
relationships within national economies. When a simulation model is given a
trade policy “shock,” such as the implementation of tariff reductions embodied
in an agreement, the model traces the effects of the shock through the bilateral
trade and input-output relationships in a manner consistent with a particular
economic theory. Model results depend primarily on the size of the shock, the
degree to which agents in the model are assumed to readjust their behavior
when the shock changes relative prices, and theoretical assumptions about the
nature of competition and production.
The standard economic simulation model used in trade policy analysis is a
static general equilibrium model that assumes perfectly competitive markets,
constant returns to scale in production, and differentiation of products by
country of origin.3 Models of this type have been used for trade policy analysis
3
68
See Devarajan et al. (1997).
since the Tokyo Round.4 Experience with the standard models suggests that
significant trade policy liberalizations raise economic welfare by between 0.5
and 1 percent of GDP.5 Most of the studies reviewed in this section are
consistent with this finding, though the estimated effects on the United States
are typically smaller.6 However, alternate assumptions about the size of the
shock, the nature of market competition, the technology of production, and
the degree to which there are economic links between current and future
behaviors can affect the results.
Economywide general equilibrium models are particularly useful for
producing estimates of the effect of trade policy changes on sectoral output and
employment, and bilateral trade flows. They can also provide estimates of
changes in wages and capital returns, as well as summary measures of
economic welfare.7 Most simulation studies reviewed below suggest that U.S.
production, wages, the rental rate of capital, exports, and imports increase
modestly as a result of implementation of each of the agreements.
Consistent with economic theory, the models report that trade policy
liberalization reallocates resources across sectors. Some sectors, primarily
export-oriented sectors that benefit from foreign tariff reductions, grow as a
result of the agreement. Output falls in other sectors, primarily those that face
significant import competition and a significant change in U.S. import
restraints. As in the aggregate results, sectoral estimates suggest that the
relative impact of liberalization on the United States appears to be modest,
4 The earliest of this work was Brown and Whalley (1980). See also Deardorff and
Stern (1983).
5 The similarity of this result across experiments is so consistent that the 0.5 to 1.0
percent figure has been given a name–the Harberger constant (after Arnold Harberger,
who first described the measurement of these types of losses). See Rutherford and Tarr
(2002).
6 Because of the large size of the U.S. economy, trade accounts for a smaller share of
output than in most countries. The United States also has a large share of services in
output, and services are less likely to be traded than goods. Thus, economy-wide effects
of trade liberalization on the U.S. economy are smaller, in relative terms, than for most
other countries. Moreover, trade agreements have historically done much less to
liberalize services trade than goods trade.
7 Because model estimates can predate the implementation of an agreement, model
results are sometimes misinterpreted as predictions that can be verified after the
agreement has been implemented and economic variables observed, which is not a
correct understanding of the model output. The model only measures the effect of trade
policy changes, but leaves constant all other sources of economic change that might
affect one or more variables. Because it is impossible to account for all other sources of
economic change, it is not possible to verify the model ex post simply by comparing the
model to observed changes in economic data. Model verification exercises must
incorporate other economic shocks, including exchange rate movements, economic
growth, and technological change, before the results can be compared with data that are
observed ex post.
69
especially when compared to other changes that were expected to
simultaneously occur in economy. The relatively modest degree of sectoral
output and employment shifts suggests that adjustment costs associated with
liberalization (worker dislocation and plant closure) are correspondingly
modest.
Recent developments in economic theory, along with greater computing
power and data availability, have allowed researchers to consider the effects of
trade policy changes using alternative models of economic behavior. Models
that differ from those with the basic structure described above began to be
widely used at the time of the Uruguay Round and NAFTA negotiations.8 In
general, models that included scale economies in production, imperfect
competition, or dynamic investment flows and an endogenous price of capital
showed larger economic responses to trade policy changes. Model experiments
that removed both tariffs and nontariff barriers also produced larger effects than
model experiments that removed only tariffs.
While the diversity of policy simulation approaches makes it difficult to
summarize results, an overview captures a sense of the reasonable bounds for
the impacts of trade policy. Table 4-1 provides a guide to the simulation studies
reviewed as background for this chapter. The selection of studies reviewed is
representative rather than exhaustive; many of the studies discussed here
contain citations to further studies. The table shows a description of key
assumptions and the predicted impact on welfare, exports, and imports from
each of the models surveyed, by trade agreement. Sectoral results for each
study are also reported in Table 4-2. The table lists sectors for which the largest
impacts on output, exports, and imports are expected for the NAFTA and the
Uruguay Round agreements.
Overall Impact on U.S. Economy
Although the ex ante studies were done using different base periods and
methodologies for various experiments, most show that overall U.S. welfare,9
wages, the rental rate of capital, exports, and imports were expected to increase
8 Earlier examples of CGE trade analyses exploiting scale economies, product
differentiation and oligopolistic behavior include studies of the Canadian economy by
Harris and Cox. See Harris (1984), Cox and Harris (1985 and 1986). The first two of
these papers modeled unilateral free trade and stylized, multilateral free trade as it
affected Canada. Cox and Harris covered the effects on Canada of a limited sectoral
trade agreement with the United States. Because these studies only reported effects for
Canada, they are not included in table 4-1.
9 Welfare is measured as equivalent variation, as most studies report it. Equivalent
variation is useful for measuring welfare changes in situations in which prices change,
such as changes in trade policy. It is defined as the amount of additional income that one
has to provide at the old prices to make one equally as well off as they would be at the
new prices. This number is positive for an increase in welfare, and is usually measured in
terms of the preferences of one or more representative consumers in the model.
70
Table 4-1
Summary of selected simulation studies: Predicted impact on U.S. welfare, imports, and exports
Agreement
Study
Market
Investment
Sectors
Regions
Base
Year
Welfare
Exports
Imports
Is Final
Agreement
Used ?
Experiment
No
Tariff cuts from Swiss
formula
—— Percentage change ——
Tokyo Round
CFTA
NAFTA
Brown and Whalley
(1980)
Deardorff and Stern
(1986)
Whalley (1984)
Brown and Stern (1989)
Brown, Deardorff, and
Stern (1992)
Brown, Deardorff, and
Stern (1992)
Burfisher, Robinson, and
Thierfelder (1994)
71
See notes on last page of table
CRTS
Static
5
4
1973
0.065
1.6
CRTS
Static
29
35
1976
0.040
CRTS
CRTS
Static
Static
33
33
4
4
1973
1973
0.000
0.200
1.9
1.6
Yes
IRTS
Static
29
4
1976
0.085
4.9
4.0
No
Tariff cuts and NTB
removal
Tariff cuts
Tariff cuts and NTB
removal
Tariff elimination
IRTS
Static
29
29
1989
0.100
1.1
1.1
Yes
Tariff elimination
IRTS
Static
29
29
1989
0.100
1.7
1.6
No
Tariff elimination
IRTS
Static
29
29
1989
0.300
2.0
1.8
No
Tariff elimination and
expansion of some
quotas
IRTS
Static
29
29
1989
0.100
0.6
0.5
No
Tariff elimination for U.S.
and Mexico
IRTS
Static
29
29
1989
0.200
0.9
0.7
No
CRTS
Static
11
3
1987
No
CRTS
Static
11
3
1987
No
CRTS
Static
11
3
1987
No
Tariff elimination for U.S.
and Mexico and
expansion of some
quotas
Tariff and quota
elimination (US and
Mexico) with internal
migration
Tariff and quota
elimination (US and
Mexico) with internal and
international migration
Tariff and quota
elimination (US and
Mexico) with no migration
Yes
Yes
72
Table 4-1—Continued
Summary of selected simulation studies: Predicted impact on U.S. welfare, imports, and exports
Agreement
Study
Market
Investment
Lopez, Markusen, and
Rutherford (1994)
IRTS
Roland-Holst, Reinert,
and Shiells (1994)
Trela and Whalley (1994)
Uruguay
Round
Brown, Deardorff, Fox
and Stern (1996)
See notes on last page of table
Base
Year
Welfare Exports
Imports
—— Percentage change ——
Is Final
Agreement
Used ?
Sectors
Regions
Static
4
4
1989
0.000
No
IRTS
Static
4
4
1989
-0.008
No
IRTS
Static
4
4
1989
-0.010
No
CRTS
CRTS
Static
Static
26
26
3
3
1988
1988
0.080
1.870
0.3
8.3
0.4
9.4
No
No
IRTS
Static
26
3
1988
1.660
8.0
8.6
No
IRTS1
Static
26
3
1988
2.550
10.4
12.3
No
CRTS
Static
5
4
1986
0.010
No
Removal of textile and
apparel tariffs and quotas
CRTS
Static
3
4
1986
0.005
No
IRTS
Static
29
9
1990
0.300
Removal of U.S. bilateral
steel quotas and tariffs
Tariff reductions on
industrial products with
nontariff barriers set to
zero (no MFA reform)
2.9
2.5
Yes
Experiment
Tariffs and NTBs
elimination for autos,
engines, and parts
Tariffs and NTBs
elimination for autos,
engines, and parts with a
North American content
provision
Tariffs and NTBs
elimination for autos,
engines, and parts with a
North American content
provision and trade
balance
Removal of tariffs
Removal of tariffs and
NTBs
Removal of tariffs and
NTBs
Removal of tariffs and
NTBs
Table 4-1—Continued
Summary of selected simulation studies: Predicted impact on U.S. welfare, imports, and exports
Agreement
Study
Market
Investment
Sectors
Regions
Base
Year
Welfare
Exports
Imports
—— Percentage change ——
Is Final
Agreement
Used ?
Experiment
Static
29
9
1990
0.700
Yes
Reduction of 25 percent
for services ad valorem
tariff equivalents with
nontariff barriers set to
zero
IRTS
Static
29
9
1990
0.900
Yes
Both of above
CRTS
IRTS
CRTS
IRTS
CRTS
IRTS
Static
Static
Dynamic2
Dynamic2
Dynamic
Dynamic
19
19
19
19
19
19
3
3
3
3
3
3
1992
1992
1992
1992
1992
1992
0.170
0.280
0.260
0.450
0.380
0.620
Yes
Yes
Yes
Yes
Yes
Yes
Based on Final Act
Based on Final Act
Based on Final Act
Based on Final Act
Based on Final Act
Based on Final Act
Goldin and van der
Mensbrugghe (1994)
CRTS
Dynamic
20
22
1985 to
1993
0.000
Yes
Based on Final Act
Haaland and Tollefsen
(1994)
IRTS
Static
15
4
1985
0.020
No
IRTS
Static
15
4
1985
0.020
No
IRTS
Static
15
4
1985
0.050
IRTS
Static
15
4
1985
0.030
No
IRTS
Static
15
4
1985
-0.110
No
IRTS
Dynamic
15
4
1985
0.110
No
IRTS
Francois, McDonald, and
Nordstrom (1996)
See notes on last page of table
4.2
39.9
3.9
37.5
No
Reduce tariffs and NTBs
on goods by 33 percent
Reduce NTBs on
services by 33 percent
Reduce tariffs on goods
and NTBs on goods and
services by 33 percent
Reduce tariffs and NTBs
on goods by 33 percent
and NTBs on services by
10 percent
Trade War-increase
NTB’s by 10 percent
Reduce tariffs on goods
and NTBs on goods and
services by 33 percent
73
74
Table 4-1—Continued
Summary of selected simulation studies: Predicted impact on U.S. welfare, imports, and exports
Agreement
Study
Harrison, Rutherford, and
Tarr (1994)
Hertel, Martin,
Yanagishima, and
Dimaranan (1994)3
Nguyen, Perroni, and
Wigle (1995)
1
2
3
Market
Investment
CRTS
IRTS
CRTS
IRTS
CRTS
Base
Year
Sectors
Regions
Welfare
Exports
Imports
—— Percentage change ——
Static
Static
Dynamic
Dynamic
Static
22
22
22
22
22
24
24
24
24
12
1992
1992
1992
1992
1992
0.216
0.224
0.428
0.449
0.185
CRTS
Static
10
15
1992
0.400
CRTS
Static
9
10
1986
0.200
7.7
7.5
Contestable markets, other IRTS model assumes Cournot competition, see p. 4-16.
Savings rate held fixed.
Hertel, Martin, Yanagishima, and Dimaranan’s (1994) estimates are based on a combined impact on both the U.S. and Canada.
Notes.—CRTS = constant returns to scale. IRTS = increasing returns to scale.
Source: USITC summary of cited studies.
Is Final
Agreement
Used ?
Experiment
Yes
Yes
Yes
Yes
Yes
Based on Final Act
Based on Final Act
Based on Final Act
Based on Final Act
Based on Final Act
Yes
Yes
Based on Final Act
Based on Final Act
Table 4-2
Summary of selected simulation studies: Predicted impact on output, exports, and import by sector- NAFTA
Study
Market
Investment
Experiment
Output increases by
one percent or more
Output decreases by
one percent or more
Exports increase by
ten percent or more
Imports increase by
ten percent or more
Brown, Deardorff,
and Stern (1994)
Burfisher,
Robinson, and
Thierfelder (1994)
IRTS
Static
Tariff elimination
Textiles
Glass Products; Nonferrous
Metals
Glass Products; Electrical
Machinery
CRTS
Static
Corn
CRTS
Static
CRTS
Static
Tariff and quota elimination
(US and Mexico) with
internal migration
Tariff and quota elimination
(US and Mexico) with
internal and international
migration
Tariff and quota elimination
(US and Mexico) with no
migration
Footwear; Clothing;
Furniture, Fixtures
Corn, Program Crops;
Fruit/vegetables, Oil/Gas
IRTS
Static
Engines (North American
firms only)
Engines (foreign firms only)
IRTS
Static
Engines and autos (North
American firms only for
each) and parts
Engines and autos (foreign
firms only)
IRTS
Static
Tariffs and NTBs
elimination for autos,
engines, and parts
Tariffs and NTBs
elimination for autos,
engines, and parts with CR
content
Tariffs and NTBs
elimination for autos,
engines, and parts with CR
content and trade balance
Removal of tariffs and NTBs
Engines and autos (North
American firms only for
each) and parts
Engines and autos (foreign
firms only)
Lopez, Markusen,
and Rutherford
(1994)
Roland-Holst,
CRTS
Static
Reinert, and
Shiells (1994)
See notes on last page of table
Corn
Corn, Program Crops;
Fruit/vegetables, Oil/Gas,
Consumer Durables,
Capital Goods
Corn, Program Crops;
Fruit/vegetables, Oil/Gas,
Consumer Durables,
Capital Goods
Corn
Most sectors
Transport Equipment
75
76
Table 4-2—Continued
Summary of selected simulation studies: Predicted impact on output, exports, and import by sector-Uruguay Round
Study
Market
Investment
Experiment
Trela and Whalley
(1994)
CRTS
Static
CRTS
Static
IRTS
Static
IRTS
Static
CRTS
Static
Removal of textile and
apparel tariffs and quotas
Removal of U.S. bilateral
Steel Quotas and tariffs
Tariff reductions on
industrial products with
nontariff barriers set to zero
(does not include MFA
reform)
Reduction of 25 percent for
services ad valorem tariff
equivalents with nontariff
barriers set to zero
Based on Final Act
IRTS
Static
Based on Final Act
CRTS
Dynamic1
Brown, Deardorff,
Fox and Stern
(1996)
Francois,
McDonald, and
Nordstrom (1996)
See notes on last page of table
Output increases by
one percent or more
Output decreases by
one percent or more
Exports increase by
ten percent or more
Imports increase by
ten percent or more
Apparel
Steel
Footwear, Leather Products
Iron and Steel
Transportation, Financial
Services, Personal
Services
Fishery; Transport
equipment; Non-ferrous
metal
Apparel; Textiles
Fishery; Transport
equipment; Non-ferrous
metal; Fabricated metal;
Chemical, rubber, and
plastics; Lumber; Mining;
Other machinery; Other
manufactures and
equipment
Fishery; Transport
equipment; Non-ferrous
metal
Apparel; Textiles;
Non-Grain Crops
Apparel; Textiles
Transportation, Financial
Services, Personal
Services
Table 4-2—Continued
Summary of selected simulation studies: Predicted impact on output, exports, and import by sector-Uruguay Round
Study
Market
Investment
Experiment
IRTS
Dynamic**
Based on Final Act
CRTS
Dynamic
Based on Final Act
Francois,
McDonald, and
Nordstrom (1996)
IRTS
Dynamic
Based on Final Act
Haaland and
Tollefsen (1994)
IRTS
Static
Reduce tariffs and NTBs on
goods by 33 percent
IRTS
Static
IRTS
Static
Reduce NTBs on services
by 33 percent
Reduce tariffs on goods and
NTBs on goods and
services by 33 percent
See notes on last page of table
Output increases by
one percent or more
Output decreases by
one percent or more
Fishery; Transport
equipment; Non-ferrous
metal; Fabricated metal;
Chemical, rubber, and
plastics; Lumber; Mining;
Other machinery; Other
manufactures and
equipment; Grains
Fishery; Transport
equipment; Non-ferrous
metal; Fabricated metal;
Chemical, rubber, and
plastics
Fishery; Transport
equipment; Non-ferrous
metal; Fabricated metal;
Chemical, rubber, and
plastics; Lumber; Mining;
Other machinery; Other
manufactures and
equipment; Grains
Apparel; Textiles
Exports increase by
ten percent or more
Imports increase by
ten percent or more
Food, beverage and
tobacco; Paper and printing
products; Agriculture and
industrial machinery;
Electrical goods; Metal
products; Textiles and
clothing; Other
manufactures; Rubber and
plastic products; Transport
services; Financial services
All but Chemical products
Apparel; Textiles
Apparel; Textiles
Agriculture and industrial
machinery; Office
machinery; Electrical
goods; Transport
equipment; Textiles and
clothing; Other
manufacturers
Transport services
Agriculture and industrial
machinery; Office
machinery; Electrical
goods; Transport
equipment; Textiles and
clothing; Other
manufacturers; Transport
services
77
78
Table 4-2—Continued
Summary of selected simulation studies: Predicted impact on output, exports, and import by sector-Uruguay Round
Study
Market
Investment
Experiment
Hertel, Martin,
Yanagishima, and
Dimaranan (1994)
CRTS
Static
Based on Final Act
1
Output increases by
one percent or more
Output decreases by
one percent or more
Primary Agriculture; Natural
Resources; Transport
Industries and Equipment
Textiles; Wearing Apparel;
Light Manufactures; Heavy
Manufactures
Exports increase by
ten percent or more
Imports increase by
ten percent or more
Saving rate held fixed.
Notes.—CRTS = constant returns to scale. IRTS = increasing returns to scale.
Changes in imports and exports for Roland-Holst, Reinert, and Shiells (1994) are based on increases from Canada, Mexico and the rest of the world which all are greater than 10
percent.
Source: USITC summary of cited studies.
modestly as a result of implementation of each of the agreements.10
Employment and output, while shifting from one sector to another, in most
models do not grow significantly owing to assumptions about full
employment in the models. The main focus of most of the studies is the
effect on U.S. welfare, and most find that U.S. welfare as a percentage of
GDP increases by much less than 1 percent of GDP.11 For the Tokyo Round,
welfare estimates range from zero to 0.2 percent of GDP, the impact on
welfare being less than 0.1 percent for GDP in both cases where only tariff
cuts are considered. With the exception of Roland-Holst, Reinert et al.
(1992), the impact on welfare was less than 0.1 percent for studies of the
U.S.-Canada FTA and NAFTA, even when nontariff barriers are considered.12
For the Uruguay Round, the estimated impact on welfare is greater than that
found for the other agreements, but is still less than one percent of GDP. The
impact is also greater for the Uruguay Round than for the other agreements
when only estimates with constant returns to scale and static investment are
assumed, with the welfare impact ranging from 0.17 to 0.40 percent of GDP.
Studies also generally estimate that U.S. exports and imports increased as a
result of the agreements. Although the impact on exports and imports was
reported to be less than a 2-percent increase for the Tokyo Round, the
U.S.-Canada FTA, and NAFTA, the impact is greater than 2 percent for all
Uruguay Round studies.13 Similarly, most studies find that output, and the
rental rate on capital would increase by modest amounts, usually less than 0.5
percent.
10 Surveys of studies that make this assessment for the United States are Burfisher et
al. (2001); see p. 126; and Kehoe and Kehoe (1994). Studies that make this assessment
about the overall effect of a particular agreement on all countries for the Tokyo Round
include Deardorff and Stern (1986); for the Uruguay Round, Perroni (1996).
11 See the discussion of the Harberger constant in footnote 4.
12 Note that Hertel, et al. (1995) reports combined results for the United States and
Canada. The exception was a model of NAFTA in Roland-Holst et al. (1994). They
report welfare effects ranging from 0.08 percent to 2.55 percent of GDP. The main
difference between the conclusions of Roland-Holst, et al. and those of other NAFTA
researchers is that Roland-Holst, et al. generate high estimates that included the
elimination of all nontariff barriers among NAFTA countries, even if those nontariff
barriers were not explicitly phased out. As noted below, their estimates of the magnitude
of those barriers are controversial.
13 Although there are no known ex ante CGE studies of the U.S.-Israel Free Trade
Area, Sawyer and Sprinkle (1986) use a simple partial-equilibrium framework to show
that U.S. imports (net of trade diversion) increase by $127.3 million (1983 dollars) and
U.S. exports to Israel increase by $9.4 million.
79
Scale Economies and Imperfect Competition
The impact of trade liberalization in models allowing for scale economies
and imperfect competition depends on the type of imperfect competition14
introduced and the degree of scale economies15 assumed. Although in most
cases the introduction of imperfect competition increases the agreements’
measured impact on U.S. welfare, the estimated magnitude of the impact varies
widely. These mixed results are not surprising since the gains from trade that
accrue by taking advantage of scale economies and introducing more
competition may be dominated by profit shifting, as illustrated in the strategic
trade policy literature.16
Early applications of increasing returns to scale to CGE modeling of trade
liberalization, such as those done ex ante for the Canadian economy by Harris
(1984) and Cox and Harris (1985, 1986), assumed substantial scale economies
based on engineering estimates, and consequently produced large estimates of
welfare gains. Subsequent empirical work on the U.S.-Canada FTA indicated
that scale economies of the magnitude assumed were likely not realized in
practice. There is better empirical evidence for a “selection effect” of trade
liberalization, i.e. that average productivity may rise through exit of the less
efficient firms in an industry, with a consequent increase in the market share of
more efficient firms.17
In many cases, incorporation of scale economies and imperfect competition
increases estimates of the gains in economic welfare.18 This relation is clearest
14 The textbook ideal of “perfect competition” involves a large number of producers
and consumers in each industry trading a homogeneous (identical) product under
conditions of free entry and exit and perfect information. The market structure of perfect
competition as usually described involves firms producing under constant returns to
scale. Even standard CGE models depart somewhat from the assumption of
homogeneous product by differentiating among products produced in different countries.
Thus, “product differentiation” in the models described as “imperfect competition”
below refers to product differentiation within a country. There is more than one potential
model of imperfect competition, depending on which of the above assumptions are
relaxed, and in what manner.
15 In models with scale economies, also known as “increasing returns to scale,”
when output increases, the cost of production increases at a slower rate, so that average
or unit costs decline. By contrast, in cases of constant returns to scale, costs increase
proportionately with output, so that average or unit costs remain constant.
16 For example, see Brander and Spencer (1984).
17 Feenstra (2003). The section of this chapter on trade and productivity discusses
studies pertaining to the selection effect, as well as Head and Ries (1999) with respect to
scale economies and the U.S.-Canada FTA.
18 The presence of scale economies is typically measured by estimates of the cost
disadvantage ratio, which is a measure of the ratio of average costs to marginal costs in
base data. A variety of types of imperfect competition have been assumed. Although
typically firms are allowed to enter and exit, driving profits to zero, in some models the
number of firms is held fixed.
80
in studies that use both types of models. Direct comparisons of studies can
be potentially misleading because of differences in underlying assumptions
other than those made about scale economies. Market behavior under
conditions of imperfect competition is complex, and studies using this type
of model are difficult to compare to studies that assume perfect competition.
Studies that incorporate models of both perfect and imperfect competition
offer better comparisons.
For NAFTA, Roland-Holst, et al., consider three market structures: perfect
competition with constant returns to scale, Cournot competition, and
contestable markets. Cournot competition assumes that firms compete by
choosing quantities of output after observing the output of other firms. Any
given firm will choose a smaller output if other firms in the industry are
observed to choose a larger output, taking into account the amount of the
market left over. Each firm has different reactions to different observed outputs
of firms, with the degree of this reaction depending on the number and market
shares of other firms in the market and the elasticities that are assumed in the
model. For contestable markets, it is assumed that existing firms set price equal
to average cost to deter entry from other firms.19 While the Cournot model
assumes that firms can freely enter and exit the industry, the contestable
markets model assumes that the number of firms is held fixed. The authors find
that assuming Cournot competition decreases the gain in U.S. welfare, real
GDP, and employment20 resulting from NAFTA compared to the perfectly
competitive case, although introducing contestable pricing causes gains in all of
these indicators.21 They claim that because firm entry is not restricted in their
Cournot specification, aggregate gains are reduced in most countries as
“crowding in” by new market entrants drives incumbent firms up their average
cost curves.22
For the Uruguay Round, Harrison et al. (1995) assume a similar Cournot
model and find that U.S. welfare increases slightly from 0.216 percent to 0.224
percent of GDP, compared to their standard constant returns to scale model.
Francois et al. (1995) assume that imperfect competition takes the form of
monopolistic competition where increased specialization in intermediate
products makes the final goods sectors more productive because of a greater
variety in choice of specialized inputs.23 They find that assuming this form of
imperfect competition increases the impact on welfare from 0.17 percent to
0.28 percent of GDP. This study estimated a larger impact than Harrison, et al.
19
De Melo and Tarr (1992), p. 152.
Most ex ante studies assume a fixed labor supply, so aggregate employment does
not change when trade policies change. Roland-Holst et al. assume an excess supply of
labor and a fixed wage. Under these assumptions, the trade agreements increase
employment.
21 Roland-Holst, et. al (1994). See table 2-8 on p. 70.
22 Ibid, p. 71.
23 Francois, et al. (1995), pp. 150.
20
81
(1996) due to the use of higher estimates of the cost disadvantage ratios and
the use of a form of imperfect competition that captured gains from
increased input varieties, in addition to the gains from lower average costs in
expanding sectors that were captured in both studies.24
Sectoral Results
Although most studies found that U.S. welfare and other economic
indicators increased in aggregate, the results for these economic indicators were
mixed when reported by individual U.S. sectors. While exports and imports
experience some growth for most sectors in all studies, the impact on output,
employment, and prices in particular sectors depended on the specifics of each
agreement and structure of the economies involved in the agreement, as well as
the level of aggregation of the model being used.
In Deardorff and Stern (1986) implementation of the Tokyo Round
agreements results in a shift in employment toward the agriculture, forestry and
fish sector, which increases by 1.7 percent from its 1976 level, and away from
employment in production of nontradable goods.25 Their simulation features
the removal of substantial U.S. or global non-tariff barriers in the agriculture
sector.
For NAFTA, studies found a variety of results. Roland-Holst, et al. (1994)
found that U.S. output in transportation equipment would increase by 17.6
percent, which the authors attribute to trade diversion. Brown et al. (1994) find
that output in glass products would decrease by 11.8 percent, while the largest
increase in output would be an increase of slightly greater than one percent for
textiles. Burfisher et al. (1994) find that output of corn in the United States,
which was disaggregated from the food sector, increased by 4.9 percent to 6.7
percent as compared to changes of less than 0.3 percent in all other sectors,
including the aggregate farm sector of which it is part. At the implementation
of NAFTA about 30 percent of rural Mexican workers worked in the highly
protected maize sector.26 Also, Trella and Whalley (1994) find that removal of
both textile and apparel quotas and steel quotas would decrease U.S. output of
apparel by 5.0 percent and steel by 10.7 percent, with only a 0.1 percent
reduction in production of textiles.
Sectoral results from studies estimating the effects of the Uruguay Round
usually report that textile and apparel sectors sustained the greatest impact. The
reduction in trade barriers in these sectors, particularly reforms to the
24
See Harrison, et al. (1995), pp. 241, appendix C, pp. 280-284 and Francois, et al.,
(1995), p. 141 for discussions about the differing specifications between two of the
models. The specification for Roland-Holst, et al. (1994) is discussed on pp. 60-68.
25 Deardorff and Stern (1986) table 4-5, pp. 56-57, p. 58. Note that overall
employment is exogenous in their model and can only shift across sectors.
26 Brown et al. (1992), p. 1514.
82
Multi-Fiber Arrangement (MFA), were very important in the Uruguay Round
Agreements.27 Various studies of implementation of the Uruguay Round
found that the removal of quotas under the ATC made up a large part of the
increase in welfare from the entire agreement, ranging from 30 percent to 80
percent of all welfare gains for the U.S.28
Studies that report changes in sectoral output attributable to trade
agreements find that, as a rule, the most significant percentage changes for
importing markets consist of output decreases in the apparel sector, followed
by the textile sector. Harrison, et al. (1995) found that U.S. employment was
most impacted in the textile and apparel sectors, where estimated employment
falls by 10 percent and 25 percent respectively; and that the only sector
positively affected by more than 1percent is the agriculture sector.29 Similarly,
product prices are most changed in the wearing apparel sector (a 10-percent
decrease), the paddy rice sector (an 8.5-percent increase), and the wheat sector
(a 5.6-percent increase) with the only sectors changing by more than 1.0
percent being other agricultural sectors and textiles.30 Also, although they find
that the welfare gains for the United States decline when a more aggregated
12-region model was estimated instead of the standard 24-region model, they
caution that in some cases the more disaggregated model did not always
generate larger efficiency gains from liberalization.31
The estimated impact of liberalization on the United States appears to be
modest, both in the aggregate and by sector, when compared to other changes
that simultaneously occurred or were expected to occur in the economy.32
Compared to the increase in real GDP between 1979 and 2001,which grew
from $4.1 trillion to $9.2 trillion in constant 1996 dollars, the gain in overall
welfare attributable to trade agreements was small.
Hertel, et al. (1996) provided an example of a study with a useful
comparison between baseline changes in the economy and additional changes
expected as a consequence of liberalization. The authors found that expected
increases in output for the United States and Canada between 1992 and 2005
27 The MFA was replaced by the Agreement on Textiles and Clothing (ATC), under
which quotas will be eliminated at the end of 2004.
28 Harrison, et al. (1995), Francois, et al. (1995), and Hertel et al. (1995). However,
while another study shows that liberalization in textiles and clothing contributed about
30 percent of the welfare impact on the United States, it shows that liberalization in
agriculture contributed more than 40 percent of the welfare impact. Perroni (1996), table
4, p. 16. This data is originally from Nguyen et al. (1995).
29 Harrison, et al. (1995) appendix B.
30 Ibid.
31 Ibid, pp. 230-231.
32 Deardorff and Stern claim that small tariff reductions (from 8 percent to 6
percent) imply a small impact and claim that the “effect of the Tokyo Round on trade,
employment, and welfare should be measured in tenths, or even hundredths of a
percent.” Deardorff and Stern (1986), p. 59.
83
were not much different whether or not trade liberalization in the Uruguay
Round took place.33 Output in the textile sector was projected to increase by
30 percent between 1992 and 2005 in the absence of liberalization, but by
only 7 percent if the Uruguay Round were included.34 While the difference
between 30 percent and 7 percent represents significantly less output than
would otherwise have been produced, use of the dynamic baseline showed
that the general effect of increased demand was likely to outweigh MFN
tariff removal. The authors projected an increase for the United States and
Canada of 41 percent in aggregate GDP between 1992 and 2005 in the
absence of the agreement, which can be usefully compared to the modest
increase in economic welfare of 0.4 percent of GDP attributed to the
agreement.35
Nontariff Barriers
The impact of removing nontariff barriers was generally found to be larger
than that of lowering tariffs. Although nontariff barriers are difficult to
quantify, the gains from their elimination may be larger than the gains from
removing tariffs. The estimated effects of nontariff barriers on welfare can be
significantly altered by the modelers’ assumptions about who gets the rents
from such barriers, and about how the barriers are measured.36
Whalley (1984) finds that by accounting just for the quantifiable nontariff
barriers that were to be eliminated as part of the Tokyo Round, the impact on
U.S. welfare increased from $430 million (less than one-tenth of 1 percent of
1973 GNP) to $2.22 billion.37 Using a similar model, Brown and Whalley
(1980) find that eliminating all nontariff barriers increased the impact on U.S.
33 Hertel, et al. (1995), table 14, p. 92. The underlying assumptions driving demand
seem to be modest for the 1992 to 2005 period: A 10-percent increase in population,
13-percent increase in the labor force, 43-percent increase in the capital stock, 67-percent
increase in human capital, 4-percent increase in total factor productivity growth, and
41-percent increase in real GDP. The assumption for total factor productivity was based
on a Global Trade Analysis Project (GTAP) simulation and the other assumptions are
estimates by the International Economic Analysis and Prospects Division of The World
Bank (Hertel et al. (1995), Table 6, p. 82.)
34 Hertel, et al. (1995), table 14, p. 92.
35 Hertel, et al. (1995), table 6, p. 82.
36 In the case of quota-type barriers, if the quota is assumed to be administered by
the exporting country (as in the case of MFA quotas), the rents accrue to the exporter,
and eliminating the barrier causes income from these rents to fall for the exporting
country. If the quota is assumed to be held by a domestic interest, or sold by the
importing country, the same drop in rents affects primarily the income of the importing
country. Modeling of nontariff measures other than import quotas still involves at least
an implicit assumption about who earned the quota prior to liberalization.
37 Whalley (1984), table 9-3, p. 167.
84
welfare from $780 million (in 1973 US$) to $2.04 billion.38 Deardorff and
Stern (1986) also conclude that elimination of unquantifiable nontariff
barriers has a significant impact on welfare, possibly even outweighing
welfare gains from tariff reduction.39
The relatively large impact of removing nontariff barriers is strikingly clear
in the Roland-Holst, et al. (1994) study, in which estimates of removing tariffs
from all NAFTA countries are compared to estimates of removing both tariffs
and nontariff barriers from all NAFTA countries.40 The estimated increase in
welfare for the United States is 0.08 percent for removal of tariffs only, but
1.87 percent of GDP when nontariff barriers also are removed.41 The impact
on real GDP is similar, while the relative impact on imports and exports is
even more striking. The estimated increase in imports changes from 0.38
percent to 9.37 percent of GDP and the estimated increase in exports changed
from 0.28 percent to 8.29 percent of GDP.42
However, the large size of these estimates is controversial because these ad
valorem equivalents were not taken from a direct measure of the trade costs of
nontariff barriers. The measures used by Roland-Holst, et al., which were based
on the number of tariff lines covered by at least some nontariff barriers,
misrepresented and may have substantially overstated the degree to which
nontariff barriers imposed a cost on international trade, thereby inaccurately
measuring and probably overstating the benefits of removing these barriers.
Other NAFTA studies that focused on specific nontariff barriers yielded a
smaller impact. Trella and Whalley (1994) found that removal of textile and
apparel quotas between NAFTA countries increased welfare by 0.01 percent of
GDP over a 1-year period and removal of steel quotas between NAFTA
countries increased welfare by 0.006 percent of GDP over 40 years.
Various studies on implementing the Uruguay Round found that the
removal of quotas under the WTO’s Agreement on Textiles and Clothing make
38
Brown and Whalley (1980) table 14, p. 864. It is important to note that abolition
of all non-tariff barriers without the duty reductions from the Tokyo Round would
decrease U.S. welfare by $1.55 billion (1973 U.S. dollars). This emphasizes that the
whole may be greater than the sum of the parts in measuring the welfare gains from
reducing non-tariff barriers.
39 Deardorff and Stern (1986), pp. 61-63, qualitatively estimate the effects of
changes in custom valuation, government procurement, import-licensing procedures,
subsidies and countervailing duties, and product standards. They also note that the
nontariff barriers not covered by the Tokyo Round maybe more important than the tariff
and nontariff barrier concessions that were included.
40 The proxy for nontariff barriers is an ad valorem equivalent previously estimated
by the authors in Roland-Holst et al. (1992).
41 Roland-Holst, et al. (1994), table 2-8, p. 70.
42 Ibid.
85
up a large part of the increase in welfare from the entire agreement, ranging
from 30 percent to 80 percent of all welfare gains for the United States.43
Investment Dynamics
Studies that allow for dynamic investment flows and a fixed price of
capital show a larger impact on U.S. welfare as a result of implementing the
agreements, generally doubling estimates of the impact of the Uruguay Round
on welfare. Unlike the results for scale economies and imperfect competition,
the impact can be assessed by comparing studies that allow for investment
dynamics and those which do not.44
Typically studies account for investment dynamics by assuming that the
initial level of the capital stock was optimal and then allowed the rate of
investment to fluctuate so that the capital stock adjusts to its new optimal level
as a result of the policy shock while holding the rental rate of capital constant.
By comparison, in the static model, the level of investment is held fixed while
the rental rate of capital adjusts to the trade liberalization introduced in the
model. In the dynamic model, the change in investment alters the amount of
resources in the economy, making the impact on welfare larger while the
change in the rental rate of capital in the static model does not significantly
affect welfare. However, Harrison, et al. (1996) note that by holding other
factors constant, these models provide an upper bound on potential welfare
gains in the long run, given that the forgone consumption necessary to obtain
the larger capital stock is ignored.45
Dynamic models of this type were used in studies of the Uruguay Round,
generally doubling the impact of the agreement. Harrison, et al. (1996) show
that the impact on welfare increased from 0.22 percent to 0.45 percent of GDP
when they allow the capital stock to be endogenous (determined within the
model by the behavior of other variables) and hold the price of capital fixed in
each country, the opposite of the static case.46 However, effects on employment
and prices by sector changed only slightly when the capital stock is
endogenized.47 Likewise, Haaland and Tollefsen (1994) find that the impact on
43
See the discussion at footnote 25.
One study for which such a comparison can be made is Goldin and van der
Mensbrugghe (1995). However the investment dynamics introduced in their model are
much different than those used in the other studies.
45 Harrison, et al. (1995), p. 231.
46 Ibid, p. 232, table 4, p. 221, table 9, p.229, table 10, p. 232, and table 13, p.239.
This results from is the result using their “the preferred increasing returns to scale model.
The results from the constant returns to scale model show that the impact on welfare
increase from to 0.22 percent to 0.43 percent of GDP.
47 Harrison, et al. (1995), appendix B.
44
86
welfare increases from a 0.05-percent increase to a 0.11-percent increase
when shifting from a static model to a dynamic model.48
Francois, et al. (1996) find that the impact on U.S. welfare and real wages
was larger when allowing for an endogenous capital stock and an endogenous
saving rate.49 Assuming constant returns to scale, they find that the impact on
U.S. welfare increases from 0.17 percent to 0.26 percent of GDP when the
capital stock is allowed to be endogenous and the savings rate is fixed, thus
keeping the capital-to-GDP ratio constant. Welfare increases more, to 0.38
percent of GDP when both the capital stock and saving rate are endogenous.50
Moreover, the impact on real wages roses from a 0.30-percent increase to a
0.38-percent increase when the capital stock is endogenous. The impact rises
higher, to a 0.51-percent increase, when the saving rate is also endogenized.51
With increasing returns to scale, the shock to U.S. welfare increases from 0.28
percent to 0.45 percent of GDP when endogenizing capital but fixing the
savings rate, and increased further to 0.62 percent of GDP when both are
endogenized.52 Likewise the impact on the real wage rises from a 0.32-percent
increase to 0.45-percent increase of GDP when allowing the capital stock is
allowed to be endogenous, and grows to a 0.62-percent increase when the
saving rate is also endogenized.53
Conclusion
Despite various model specifications and different forms of trade
liberalization, most of the models surveyed here showed that the expected
impact on welfare, exports, imports, and other economic factors from these
trade agreements was modest compared to general trends in the economy.
Whether these models capture the full impact from trade liberalization is still
an open question. In this regard, model validation with respect to historical
data is difficult to perform, and should be borne in mind.54 However, the
present work with nontariff barriers, imperfect competition, and the dynamic
impact of investment shows the potential for future development of CGE
models in these areas, which may reveal other gains from trade liberalization
that have not yet been analyzed.55
48
49
50
51
52
53
54
55
Haaland and Tollefsen (1994), table 17, p. 24.
Francois et al. (1995), table 21, p. 164.
Ibid p. 164, p. 151.
Ibid, table 15, p. 157.
Ibid, table 21, p. 164.
Ibid, table 16, p. 158.
See Kehoe (2002).
See Rutherford and Tarr (2002) for examples of this potential.
87
General Economic Effects of Trade
Liberalization in the “Fast-Track” Era
Studies Evaluating Sources of Trade Growth
This section reviews the econometric literature on trade liberalization and
trade growth. While many studies link U.S. economic outcomes to growth in
trade, relatively few identify the role of trade policy changes directly.
Non-policy changes such as improved transportation and communication
technologies also contributed to trade growth.
In order to provide some context for later studies that assess the impact of
growing international trade on the U.S. economy, this section of the literature
review seeks to better understand the role that trade policy changes have played
in increasing trade. Most recent studies on this topic have attempted to explain
growth in world trade, not just U.S. trade, and this literature review reflects
that emphasis. The literature considers three alternatives to trade policy
changes as causes for trade growth: U.S. and global income growth,
innovations in transportation and communication technologies, and growth of
multistage production processes.56
The studies reviewed below take two approaches to measuring the effects
of trade policy on trade, and comparing them with other possible causes of
trade growth. Econometric studies identify a list of possible sources of trade
growth, and use statistical hypotheses and correlation patterns to attribute
causation to one phenomenon or another. Simulation methods are used to
consider complex models that are not easily estimated with econometric
methods. Econometric studies of trade growth are often designed to attribute all
observed trade growth to one cause or another.57 Simulation studies typically
consider individual phenomena and leave the rest of trade growth
unexplained.58 The new analysis in the present report includes econometric
applications in chapters 6 and 8, the first evaluating the impact of NAFTA and
56 Another possible source of global trade growth–but one that does not appear to be
addressed in the literature explaining global trade growth–is unilateral economic reform
in developing countries such as India and China. At least one study (Bernard, et al. 2003)
reviewed links U.S. economic outcomes to the entry of poor countries into world
markets. No studies were identified that linked global trade growth directly to economic
reforms in developing countries. Chapter 8 notes that 2.5 percent of U.S. import growth
over the period can be attributed to trade in new product-country pairs.
57 Such studies require the assumption that the author has included all of the main
sources of trade growth as explanatory variables. If one source of trade growth has been
left out, the procedure may attribute trade growth to another source, when it should be
attributed to the missing source.
58 Simulation studies require the author to quantify specific behavioral relationships
that define the economy’s response to trade policy changes. Estimates from a simulation
study are based on the assumption that these responses have been quantified correctly.
88
the second considering increases in product variety. A simulation study of all
five agreements is presented in chapter 7.
All of the studies reviewed in this section use an economic model to
evaluate historical experience. An economic model is needed to provide a
framework for assigning trade growth to various sources. While models
provide needed clarity, they also shape conclusions, to some extent. Two
particular questions about model features are relevant to this discussion. First,
is trade growth assumed to be proportionate to income, or does the model
allow income growth to produce a disproportionate increase in trade? In some
cases, authors do not explicitly assume proportionate trade and income growth,
but the measures they report may require us to interpret their models in that
way for the purposes of this discussion.59 Second, in what manner does the
model allow trade policy changes to interact with other sources of trade
growth? Models that allow interaction between trade policy changes and other
trade-inducing phenomena attribute a greater portion of trade growth to trade
policy changes.
The studies reviewed below suggest that the direct effect of trade policy
changes explain at most one-fourth of the growth in world trade.60 Other
factors, particularly income growth, appear to explain a larger share of trade
growth. When the economic model used to explain trade growth allows trade
policy changes to interact with other economic changes, especially falling
transportation costs and the growth of multistage production, trade policy
changes explain a greater part of total trade growth. One model with
interactions between tariff changes and multistage production attributes half of
trade growth to tariff reductions.
The Role of Trade Policy in Explaining Trade
Growth
In an article in Brookings Papers on Economic Activity, Krugman (1995)
explains that the causes of the growth in world trade are in dispute. He notes
that journalistic discussion of the growth in world trade tend to emphasize
changes in transport and communication technologies, while the academic
literature tends to emphasize the role of trade policy changes. Research since
1995 has brought forth further evidence on this discussion, but it remains
difficult to assign any one cause a leading role.
59
Several authors seek to explain growth in the ratio of exports to GDP. This
measure would remain constant if exports and GDP grew proportionately.
60 Since U.S. tariff reductions over the period are more modest than tariff reductions
in the rest of the world, it is likely that a smaller share of U.S. import growth can be
directly attributable to trade policy changes.
89
Baier and Bergstrand (2001) use an econometric approach to address the
issue, estimating a gravity model of trade (a model that empirically relates
trade to measures of the size of the trading economies and of the distance
between them) to explain trade growth among members of the Organization
for Economic Cooperation and Development (OECD), an organization that
includes most of the world’s developed countries. Baier and Bergstrand
consider the period 1958-1988, during which intra-OECD trade increased by
148 percent. They conclude that about two-thirds of the trade growth in the
period can be attributed to growing incomes, about one-fourth to tariff
reductions, and less than one-tenth is attributed to lower transport costs.61
Baier’s and Bergstrand’s paper is perhaps the most straightforward
assessment of the relative importance of various explanations for world trade
growth. While useful, a number of qualifications should be made before any
conclusions are drawn. First, the international transport cost data used in this
assessment appear to be poorly correlated with more reliable measures of trade
costs.62 Second, the experiment does not contain measures of nontariff barrier
removal, which might have given more weight to trade policy changes. Third,
the model measures trade in final goods, and does not allow the growth in
multistage production to account for trade growth. Finally, the model does not
allow trade policy changes to interact with other sources of trade growth. These
qualifications are addressed in individual papers that follow, but none of the
subsequent literature has provided the comprehensive overview that Baier and
Bergstrand provide.
A number of technological improvements in transportation, particularly the
containerization of freight, have suggested to many that international transport
costs may have declined significantly in recent years. A recent article by
Hummels (1999) evaluates this hypothesis. Hummels notes that freight rates
average about 12 to 15 percent of the value of imported products, so freight
rates are a larger impediment to trade than existing tariffs. Ocean shipping
freight charges rose through the 1970s, peaked around 1985, and have fallen
back to early 1970 levels. Air freight rates have fallen considerably over time,
which is significant because air freight now accounts for nearly 25 percent of
import value (Hummels 2001). Overall, Hummels concludes that freight rates
61 Baier and Bergstrand consider a fourth potential cause of trade growth, growing
similarity of incomes across countries. The economic model posited by Baier and
Bergstrand suggests that increased income similarity should increase trade flows. They
attribute little, if any, of world trade growth to this fourth cause.
62 In order to obtain transport cost data for all countries in their sample, Baier and
Bergstrand use matched country trade data from the International Monetary Fund to
infer transport costs. Some countries, including the United States, collect direct evidence
on freight costs. It does not appear that the transport cost data inferred from International
Monetary Fund statistics match up well with the directly observed data available
elsewhere. See Hummels and Lugovskyy (2002).
90
as a whole are not appreciably lower than in early 1970s,63 but that rapid
declines in air freight rates signal an important quality improvement in
transportation technologies. Other innovations such as containerization and
faster ocean shipping may also have improved speed, even if these
technological changes have not produced lower measured freight rates.
In another article, Hummels (2001) uses the difference between ocean and
air freight charges to estimate the value of faster shipping times to
time-sensitive importers. Air freight rates are typically 2.5 times higher than
ocean freight rates, yet 30 percent of U.S. imports arrived by air in 1998, so
Hummels postulates that a large number of importers are time sensitive. Using
an econometric model that evaluates importers’ willingness to pay for faster
shipping, he concludes that the use of air freight and falling air freight charges
imply significant reductions in the tariff equivalent of time costs associated
with trade. Hummels estimates that the introduction of lower-cost air freight
since 1950 has been equivalent to a 23-percent tariff reduction for
manufactured goods.64 Hummels argues that these reductions may have been
particularly important in facilitating the growth of multiple-stage production in
manufacturing.
A growing body of literature seeks to better understand multiple-stage
production, also known as “outsourcing,” “production fragmentation,” and
“vertical specialization.” Most trade models, such as the one used in Baier and
Bergstrand, assume that traded goods cross only one national border. In recent
years, manufacturers have “sliced up the value chain,” segmenting production
of goods into multiple stages in multiple countries. By the time final assembly
is completed, some components may have crossed several international borders.
As evidence in the growth of this phenomenon, Feenstra (1998) reports the
ratio of merchandise trade to merchandise value added. In 1970, the value of
traded goods divided by value added in goods-producing industries was 13.7
percent; by 1990 the ratio had grown to 35.8 percent.65 By 2000, the ratio
measured by Feenstra had risen to 56.7 percent.66 Other industrial countries
also saw increases in the Feenstra measure.
Hummels et al. (2001) use a similar concept, “vertical specialization,”
which is a measure of the value of a country’s imports that are embodied in its
63 Data on the freight charges associated with U.S. trade are available beginning
with 1974. U.S. freight charges in 1998 were approximately 30 percent lower than in
1974. However, data from other freight series suggest that 1974 rates may have been
about 30 percent higher than 1973 rates because of increased fuel prices. The difference
between the imputed 1973 data and the actual 1998 charges suggests very little change in
the average freight charges between 1973 and 1998. See Hummels (1999).
64 Note that the tariff reductions embodied in the five agreements considered here
implied average tariff reductions of only 3 percent (see chapter 3).
65 Feenstra (1998), table 2.
66 USITC calculations based on USDOC, Bureau of Economic Analysis data. Note
that trade is measured in total value terms, not value added, so this ratio is not
constrained to be less than 100 percent.
91
exports. In 1972, 6 percent of U.S. merchandise export value was imported
intermediates; by 1990 that figure had risen to 11 percent of value. The
vertical specialization measure for the OECD increased from 16.2 to 19.8
between 1970 and 1990. This suggests that some part of U.S. and OECD
trade growth can be explained by increased fragmentation of production.
Hummels et al. provide a decomposition total trade growth. After accounting
for trade growth associated with GDP growth, about 30 percent of
industrialized country trade growth between 1970 and 1990 can be attributed
to vertical specialization.67 Estimates for the United States over a similar
period indicate that 14 percent of U.S. export growth not explained by
growing output was due to vertical specialization.
Yi (2001) builds a simulation model in which tariff reductions could
facilitate vertical specialization. Yi notes that the merchandise export share of
output tripled over the period 1962-1999. Standard final goods models could
not explain this growth without implausible assumptions about consumers’
willingness to substitute imports for domestic production. Yi demonstrates that
a model allowing tariff reductions to induce vertical specialization can explain
a larger portion of world trade growth. In Yi’s model, tariff reductions
explained only 35 percent of the growth in exports. That 35 percent occurred
when tariff reductions were assumed not to induce increased vertical
specialization. When tariffs were allowed to induce vertical specialization, the
model explained 53 percent of observed export growth. This model indicated
that the role of tariff reductions can be magnified if tariff reductions interact
with other phenomena.68
Hummels and Skiba (2003) investigate the interaction between tariff rates
and transportation costs. The authors suggest a number of reasons why lower
tariffs might be associated with lower transport costs. For example, lower
tariffs may induce increased trade volumes, which may in turn facilitate
competition among shippers, thus lowering transport costs. Larger trade
volumes may also justify increased investment in transport infrastructure.
Hummels and Skiba demonstrate that containerized shipping is more likely on
routes with higher trade volumes. Using an econometric model linking freight
67 Where Baier and Bergstrand attribute a specific share of trade growth to income
growth, Hummels et al. measure that part of the trade growth exceeding growth in GDP.
Thus, Hummels, et al. explain that portion of trade growth not explained by
proportionate growth in trade and GDP.
68 Yi’s simulation techniques do not assign all the trade growth to one cause or
another, as Baier and Bergstrand’s econometric techniques do. In Yi’s model, trade
growth unexplained by the simulation model is left unexplained. Simulation models like
Yi’s might overemphasize trade growth if the trade cost reductions were sufficiently
large. For example, including the tariff equivalent reductions in the time costs of
transport generated by Hummels (2001) would likely lead Yi’s model to generate more
trade growth than was actually observed. While simulation models allow investigations
of more complex phenomena, such as the interaction between trade costs and vertical
specialization, they do not allow a comprehensive decomposition of the growth in trade.
92
rates to trade volumes, they find that a doubling of trade volumes reduces
transport costs by one-third. Thus, if tariff reductions induce trade, they
should also lead to lower freight charges. Like the Yi model, this model
suggested that tariff reductions might have spillover effects that magnify the
impact of tariffs on trade.
In a recent controversial piece, Rose (2002) finds that a country’s date of
World Trade Organization (WTO) membership is uncorrelated with a large
number of measures of liberal trade policy. This finding appears to imply that
membership in the WTO does not induce trade liberalization. However, such a
conclusion ignores several important institutional features of the WTO. First,
much WTO-induced liberalization takes place not at the time of membership,
but in the rounds of WTO-sponsored negotiations taking place after
membership. Second, a good deal of apparent unilateral liberalization taking
place prior to WTO membership takes place in order to satisfy the members of
a country’s WTO accession party in a process which typically lasts five to ten
years, or longer. Thus, the particular year in which a country gains its seat in
the General Council, as analyzed by Rose, reflects relatively little of the
country’s actual policy interactions with the WTO.
Conclusion
Econometric estimates of the effect of tariff reductions on trade suggest
that tariff reductions explain anywhere from 25 percent to 50 percent of the
growth in world trade, with models that assume that tariff reductions induce
foreign outsourcing yielding higher estimates. Other phenomena, notably
reductions in the cost of air transportation, appear to have been at least as
important a source of world trade growth.
Estimates of the Effects of the Agreements on
Trade
This section presents the relevant findings of quantitative studies that use
data for the period after the agreements came into effect.69 Most of the
extensive literature that examines the impact of these agreements on trade are
ex ante analytical studies. Only a few use actual data to explicitly analyze
preferential trading arrangements and to determine if these arrangements were
trade-creating or trade- diverting. In addition, very few of these studies
investigate the direct impact of the agreements. Most employed the gravity
model to capture the impact of the agreements on trade. Gravity models
frequently use binary variables to capture this impact. One problem with this
69 Empirical studies of the Tokyo and Uruguay Rounds tend to be political economy
case studies, such as Baldwin and Murray (1997), and Ray and Marvel (1995). No
studies were found dealing with the U.S.-Israel FTA.
93
approach is that the estimated coefficient on the binary variable measures the
trade effect of the agreements as well as all other events during this period
that affected trade. To overcome this, more recent studies have attempted to
use a more direct measure of the agreements. The estimated coefficient in
these studies provides a more direct measure of the impact of tariff
reductions due to the agreements but does not capture the impact of nontariff
barrier reductions owing to the agreements.
A growing body of studies looks explicitly at preferential trade
arrangements and their impact on trade. Most of these studies use the gravity
model to determine the impact of the formation of trading blocs on trade flows.
Examples include Frankel (1997), Gould (1998), Krueger (1999), and Baier
and Bergstrand (2001). More recent studies employ a more direct measure of
an agreement to measure its impact on trade. These include Clausing (2001),
Romalis (2001), and Agama and McDaniel (2003).
Frankel (1997) uses the gravity equation to examine the impact of trading
blocs on intraregional trade and finds that even after holding constant for the
natural determinants of bilateral trade, preferential trading blocs boost trade
among member countries in the European Community, Association of
Southeast Asian Nations, the Australia-New Zealand Closer Economic
Relations, the Andean Pact, and the Southern Common Market Agreement
(Mercosur). Frankel also examines broader regional groups including Western
Europe, Western Hemisphere and Asia and again finds statistically significant
effects. Frankel cautions that it may not be possible to distinguish from the data
whether true concentration effects were coming from the formal regional
trading blocs or from the broader regional groups, given the overlap in
membership.
Gould (1998) finds that NAFTA had an effect on U.S.-Mexico trade, but no
effect on U.S.-Canada or Canada-Mexico trade. Gould reports that both U.S.
imports from Mexico and U.S. exports to Mexico were, on average, about 16
percent higher for each year during the 1994-1996 period than they would have
been without NAFTA. Gould reports the cumulative impact of NAFTA during
this period to be $20.5 billion in U.S. imports, and $21.3 billion in exports. In
contrast to these two studies, Krueger (1999) finds no evidence that NAFTA
had any significant effects on North American trade.
In a new application of the gravity model to the analysis of preferential
trade arrangements, Adams et al. (2003) extensively review existing gravity
model studies of such agreements as well as undertake new analysis of sixteen
bilateral and plurilateral agreements over the period 1970-1997. This analysis
takes account of many econometric issues associated with gravity modeling,
such as variation across industries and across the provisions of different trade
agreements, controlling for a wide variety of distance measures, and carefully
handling the large number of observations with zero trade.
Adams et al. find that the model they estimate attributes net trade diversion
to twelve of the sixteen agreements under study. Both previous literature and
their own model associate net trade diversion with NAFTA, while their model
94
associates net trade creation with the U.S.-Israel Free Trade Agreement, which
had not been previously analyzed using this technique. In a separate analysis of
the investment provisions of preferential trade agreements, Adams et al. find
that such provisions were associated with larger stocks of direct investment
between NAFTA and the rest of the world (both inward and outward), but
smaller intra-NAFTA investment stocks.
More recent studies attempt to use more direct measures of the agreements
to assess the impact on trade. Clausing (2001) was the first to exploit the
variation in tariffs at the detailed commodity level in an attempt to better
isolate the trade effects of the U.S.-Canada FTA . Clausing finds that the
U.S.-Canada FTA had significant effects on trade between Canada and the
United States over the 1989-1994 period. Clausing’s regression results indicate
that U.S. imports from Canada were 26 percent higher owing to the agreement.
Clausing estimates that over half (54 percent) of the $42-billion increase in
U.S. imports from Canada is attributable to the agreement. In another study,
Romalis (2001) uses a methodology similar to Clausing’s to examine the
impact of NAFTA on North American trade. Romalis calculates the tariff
preference owing to NAFTA for one year and examined its impact across
industries, finding that NAFTA had a substantial effect on North American
trade. Romalis reports that the estimated effect of an additional 1-percent
preference is a 0.23- to 0.28-percentage point increase in Canada’s share of
U.S. imports. Similarly, an additional 1-percent preference is associated with a
0.18- to 0.28-percentage point increase in Mexico’s share of U.S. imports. In a
third study, Agama and McDaniel (2002) extend the work done by Romalis to
capture the time-varying effects of the tariff preference and find that, on
average, an additional 1-percent preference corresponds to a 11.2- to
16.5-percent increase in U.S. import demand for Mexican goods over the 1989
to 2001 period. During the NAFTA period, an additional 1-percent preference
corresponds to a 3.8- to 4.4-percent increase in U.S. import demand for
Mexican goods. On the export side, the authors find that a 1-percent increase in
the NAFTA tariff preference corresponds to about a 5.1- to 6.7-percent increase
in Mexico’s demand for U.S. goods.
There is a consensus in the literature that trade agreements have the
potential to increase trade among member countries. However, questions
initially raised by Viner (1950) and Meade (1955) remain about the extent to
which these trade agreements are net trade creating or net trade diverting.70
Viner and Meade argue that preferential trading arrangements71 can either
enhance or reduce welfare, depending on the relative magnitudes of the trade
70 Trade agreements increase trade within the trading bloc as low-cost member
countries displace high-cost domestic producers (trade creation), and divert trade away
from non-member countries outside the bloc as member countries reorient trade away
from low-cost, nonmember countries towards higher-cost member countries (trade
diversion).
71 Unless otherwise indicated, the terms “preferential trading arrangement” and
“regional trading arrangement” will be used interchangeably.
95
creation and trade diversion effects. Some economists, such as Krueger
(1999) and Burfisher et al. (2001) argue that although this distinction has
been modified and amended in a number of ways, the original Viner and
Meade conclusion that preferential trading arrangements can enhance or
reduce welfare remains. Therefore, the issue of the net effect of preferential
trading arrangements on welfare is an empirical one. Other economists, such
as Wall (2003), argued that integration affects trade in numerous ways, and
few studies fit into the simple Vinerian dichotomy between trade creation and
trade diversion.
One significant non-Vinerian way for integration to affect trade is through
increasing returns to scale. If economies of scale can be realized, they offer
individual firms an opportunity to achieve greater international
competitiveness.72 This issue has been explored in the previous section on
simulation modeling in the context of the Cox and Harris estimates of the
effects of the U.S.-Canada FTA. The issue, which will be discussed further in
the section on productivity, is whether significant gains from scale as a result
of trade liberalization can be inferred using estimates of scale effects that are
reasonable as opposed to implausibly large.
Most ex ante studies using simulation methods maintain the orthodox
assumptions underlying the pure theory of international trade, including the
assumptions of perfect competition and production and consumption of
homogeneous traded goods. A large number of ex post studies use the gravity
model to determine the impact of a specific trading agreement on trade.
Gravity models are less restrictive than CGE models in that they do not require
strong explicit assumptions about the structure of the economy in order to
provide results. Burfisher et al. (2001) argue that although gravity models do
not incorporate the features of many trade theory models, they provide an
empirical way to control for income changes and other macroeconomic shocks.
In its original form, the gravity equation relates the value of bilateral trade
flows to national income and distance. Researchers have commonly extended
the gravity model beyond its original form in an ad-hoc fashion.73 Dummy
variables (binary variables indicating, in this case, the existence of a trade
agreement) have typically been used to measure the impact of a trading
agreement on trade. Examples of gravity studies include Rose (2000), Feenstra,
Markusen and Rose (2001) and Frankel and Rose (2002). These studies
included new variables such as common colonial ties, common colonizer,
remoteness, landlocked condition, and land area in their models, as well as a
single dummy variable to control for trade within any regional trading
arrangement instead of a set of dummy variables, as in earlier studies. Despite
the lack of agreement among researchers about which additional variables
72
See DeRosa (1998).
Most authors include additional variables to control for differences in geographic
factors, colonial ties, exchange rate volatility and trade policy.
73
96
should be included in the extended gravity model, the general consensus is
that members of a common trading arrangement tend to trade more with each
other than they would otherwise. However, unless additional structure is
imposed either in the estimation or in the interpretation of the results, this
finding cannot for many studies readily be interpreted as a confirmation or
falsification of Vinerian hypotheses about trade creation and trade diversion.
This consensus among empirical researchers has recently been questioned by
Ghosh and Yamarik (2003, forthcoming) who used extreme bounds analysis74
to test the robustness of the hypothesis that regional trading arrangements are
trade creating and find that the trade-creation effect of most of these
arrangements is fragile.
A few studies examine the effect of the U.S.-Canada FTA on bilateral
trade. For example, Trefler (2001) uses an econometric framework to assess the
impact of tariff cuts under the agreement on Canadian imports of manufactured
goods from the United States as a share of Canadian output. Trefler find that
the U.S.-Canada FTA tariff cuts were a statistically significant determinant of
these import shares. According to Trefler, the tariff cuts explain most of the
large shift in import shares experienced by the most impacted industries. For
example, the ratio of imports to output increased by 72 percent for the most
affected industries, and this number was very close to the 67 percent attributed
to the FTA.
Other studies examine the impact of NAFTA on North American trade. As
noted, most of these studies use the gravity model to measure the impact of
NAFTA. Gould (1998) uses the gravity model to examine the impact of
NAFTA on the growth of North American trade over 1980-1996, and
concluded that NAFTA had an effect on U.S.-Mexico trade, but had no effect
on U.S.-Canada or on Canada-Mexico trade. Gould compared his model
predictions of bilateral trade flows to actual bilateral flows over this period,
and concluded that both U.S. imports from Mexico and U.S. exports to Mexico
74 The traditional econometric approach to the specification problem is to apply
certain criteria tests such as correct signs, significant t-values and high R-squares to
search for the “best” specification. This approach encourages selective reporting from a
large set of estimated models. The extreme bounds analysis of Leamer (1982), and
Leamer and Leonard (1983) avoids the selective reporting bias of the traditional
approach by explicitly incorporating prior information and following a systematic
approach to testing the robustness of coefficient values. Utilizing this approach, Ghosh
and Yamarik (2003, forthcoming) summarize the previous gravity model literature into
two priors–trade creation and trade creation and diversion. For each prior, the
k-regressors are divided into two categories: “free” variables and “doubtful” variables.
The free variables were always included in previous studies, whereas the doubtful
variables were not always included. An application of extreme- bounds analysis yields
the minimum and maximum values for the coefficient of each free variable when all
possible combinations of the doubtful variables are considered.
97
were on average about 16 percent higher each year during 1994-1996 due to
NAFTA. This translated into a cumulative NAFTA impact of $20.5 billion in
imports, and $21.3 billion in exports over this time period.
Krueger (1999) uses a gravity model to study North American trade
patterns. She analyzes data for 61 countries over 6 years, comprising every
other year over the 1987-1997 period, but finds little evidence that NAFTA had
any significant effect on North American trade at the aggregate level. Krueger
also uses “shift-and-share” analysis to examine North American trade at the
SITC 1-digit level and reports large increases in Mexican exports of particular
categories of goods, most notably machinery and equipment. Krueger finds that
in instances where Mexico’s share of the U.S. market increased dramatically,
Mexico’s share of third country markets also increased. She offers a number of
explanations for this result. One is that NAFTA was primarily trade creating
and not trade diverting. An alternative is that the exchange rate change in 1995
was probably a more important factor than NAFTA in explaining the increases
in trade in individual commodity groups. Krueger concluded that other events,
especially those affecting trade through the real exchange rate and Mexico’s
other trade liberalization such as the Uruguay Round, appear to have
dominated whatever effects NAFTA may have had on trade patterns over this
time period.
Burfisher et al. (2001) examine changes in bilateral trade data for three
sectors–agriculture, autos, and textiles–to determine the impact of NAFTA. The
authors reported that between 1993 and 1998, U.S. agricultural exports to
NAFTA partners increased by an annual average rate of 9.5 percent compared
to a 2.8-percent annual increase to non-NAFTA partners. U.S. agricultural
imports from NAFTA countries increased by an average of 13.8 percent
annually compared to a 7.7-percent annual increase from non-NAFTA
countries. The study found evidence of increased integration in the North
American auto industry since NAFTA went into effect. The data showed that
U.S. auto imports from Mexico more than doubled between 1993 and 1998,
and U.S. auto exports to Mexico increased 14-fold, albeit from a low base,
during this period.
The authors report that since NAFTA, U.S. imports of textiles and apparel
from Mexico have risen, while imports from East Asia have declined. U.S.
textiles export shares to Mexico rose from 13.4 percent in 1993 to 31.0 percent
in 1999, but U.S. textiles export shares to East Asia fell from 14.5 percent to
10.3 percent during this period. The results were similar for apparel trade. U.S.
apparel import shares from Mexico increased from 4.0 percent in 1993 to 13.5
percent in 1999, whereas U.S. apparel import shares from East Asia declined
from 70.7 percent in 1993 to 55.4 percent in 1999. U.S. apparel export shares
rose from 17.5 percent in 1993 to 31.6 percent in 1999. Other industry studies,
such as Wylie and Wylie (1996), found that while there is some trade
diversion, the increase in NAFTA trade is dominated by trade creation.
Soloaga and Winters (2001) use the gravity model to study preferential
trading arrangements and found no evidence of trade diversion for NAFTA.
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Coughlin and Wall (2000) use the gravity model to analyze how NAFTA has
changed the pattern of exports of U.S. states to foreign geographic destinations.
Wall (2003) uses the gravity model to examine how NAFTA has changed the
regional pattern of North American trade and finds significant differences
across countries and regions.
There are a number of ex post empirical studies on preferential trading
arrangements that used alternative methods to the gravity model to capture the
trade effects of specific agreements. For example, the USITC NAFTA study
(1997) uses import demand and export demand functions to estimate the effects
of the NAFTA on U.S. trade with Canada and Mexico using an error-correction
model and monthly data from January 1989 to October 1996 at the 4-digit SIC
level. Trade flows are assumed to be functions of prices of traded goods and
domestic substitutes, income in the importing country, and, in the case of U.S.
exports for which the two prices are denominated in different currencies,
exchange rates. The effect of NAFTA is identified using dummy variables for
1994, 1995, and 1996. A trade flow at the 4-digit SIC sector is identified as
having a NAFTA-induced increase or decrease in trade if the dummy variables
were of the same sign and statistically significant for all 3 years.
Using this methodology, the USITC NAFTA study (1997) finds that
NAFTA had a significant effect on the level of U.S. trade with Mexico, but
finds no significant additional effects of the agreement on U.S. aggregate trade
with Canada during this period. As a result of NAFTA, the volume of U.S.
imports from Mexico is estimated to have increased by 1.0 percent in 1994, 5.7
percent in 1995, and 6.4 percent in 1996. On the export side, the study
estimates that, as a result of NAFTA, the volume of U.S. exports to Mexico
was higher by 1.3 percent in 1994, by 3.8 percent in 1995, and by 3.2 percent
in 1996. Further, the USITC states that NAFTA resulted in significant changes
in the volume of bilateral trade for a modest number of industries. With respect
to U.S.-Mexico trade, the study attributes significant growth in U.S. exports to
Mexico in 13 industries to the agreement, but finds no industries showing
decreased exports to Mexico due to NAFTA during this period. On the import
side, the USITC attributes significant growth in U.S. imports from Mexico in
16 industries to NAFTA, and reportes significant declines in 7 industries
because of the agreement. With respect to U.S.-Canada trade, the USITC finds
that U.S. exports to Canada increased significantly because of NAFTA in 10
industries and declined significantly in 8 industries. Similarly, the USITC finds
that U.S. imports from Canada increased significantly in 13 industries due to
NAFTA, and declined significantly in 8 industries.
Romalis (2001) uses a methodology similar to Clausing (2001) to examine
the impact of NAFTA on North American trade. He uses a conceptual
framework to develop reduced-form equations in which the shares of U.S.
imports of commodities from Canada and Mexico are dependent on the tariff
preferences the U.S. affords to Canada and Mexico under NAFTA. Romalis
calculates the tariff preference afforded to NAFTA partners and examines its
impact across industries. He concludes that NAFTA had a substantial effect on
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North American trade. However, Romalis finds no evidence of trade creation
and concluded that NAFTA has been primarily trade diverting.
Conclusion
Ex post studies of U.S. trade performance in the “fast-track” period have
focused on NAFTA, due to considerations of data availability. These estimates
have demonstrated that the NAFTA liberalizations have increased U.S.-Mexico
trade in both directions. While earlier studies had some difficulties identifying
these increases at all, improved methodologies and a longer post-NAFTA time
period have enabled them to be identified with increasing precision, associating
them with particular products that have now experienced especially deep
NAFTA tariff cuts
Effects on Growth and Productivity
For several decades now, researchers have investigated whether more open
trade has dynamic effects on a country’s economy. Does freer trade cause a
country to grow faster? If so, exactly how does this happen? Many empirical
studies have posited that freer trade increases a country’s growth rate by raising
the productivity of a country’s labor and capital (total factor productivity or
TFP). The channels through which this could occur include: exposure to
increased competition in the global market; access to new technology via trade
in information or imitation of new products; and increased foreign direct
investment (FDI) that may bring new technology.
Researchers testing the relationship between trade and growth most often
examine cross-country evidence. They test whether or not countries with
relatively open trade policies, such as the United States, have grown faster than
countries with relatively restrictive trade policies. When a time dimension is
added, they are able to test whether changes in trade policies across countries
have affected growth rates. Research covering groups of developing countries
helps us understand whether or not multilateral trade liberalization raises
growth in foreign countries, thus increasing the market for U.S. exports.
Much empirical research has been devoted to testing for evidence of the
effect of trade openness on GDP growth, via its effect on total factor
productivity. Using country-level data, researchers have found a large amount
of evidence that more open economies do grow faster. Although this work is
limited by imperfect measures of trade openness, as well as lack of precision in
modeling links between trade policy and growth, progress on both of these
problems has been made. Recent work shows that the positive effects of trade
openness on growth are evident for the United States and other industrial
countries, as well as for developing countries. These results hold for different
time periods, and for many different measures of trade openness. New evidence
also suggests that the links between trade openness and growth may be
indirect, with trade liberalization inducing more investment, and thereby more
growth.
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Researchers have also looked at firm-level data to see if there is any
evidence that trade liberalization has increased productivity at the
microeconomic level. For example, if increased exposure to global competition
makes firms more efficient, we might expect to see firms that produce exportor import-competing goods exhibiting higher productivity than firms producing
nontraded goods. In addition, we might expect that less competitive exporting
and import-competing firms would either become more efficient or drop out of
the market, as a result of being exposed to trade. Remaining firms would also
be likely to price more competitively, since monopoly power would be eroded
by new foreign competition. With greater access to foreign markets, firms
might be able to take advantage of economies of scale, or might access
imported intermediate inputs more cheaply. Both of these factors would lower
firms’ production costs. Finally, sectors with relatively high levels of FDI
might show relatively high productivity, due to technological spillovers from
the foreign firms. One of the most important limitations of this work has been
lack of data to accurately measure firm productivity. Another difficulty has
been the explicit accounting for entry and exit of firms when testing the effects
of trade liberalization on productivity.
Researchers studying trade and productivity most often examine evidence
across industries within a single country. Many recent studies have examined
U.S. firms in detail. Similar studies for other industrial countries can
corroborate the strength of the results for the United States. Studies of other
industrial and developing countries can suggest whether or not multilateral
trade liberalization has increased the efficiency of industries globally,
contributing to higher incomes and expanding markets worldwide.
Evidence from the United States, other industrial countries, and developing
countries thus far suggests that exporting firms are more productive than
nonexporting firms, and that more productive firms self-select to export.
Exporting itself may not increase productivity beyond the first year. In contrast,
import-competing industries do appear to experience increased productivity
after trade liberalization. Much of this increase occurs because resources shift
from less to more efficient firms. Some evidence suggests that exposure to
competition does reduce mark-ups in import-competing industries, and possibly
encourages more efficient scales of production. FDI may raise firm level
productivity, at least among the partners in joint ventures. Though the presence
of foreign firms may be associated with decreased productivity in
domestic-owned firms within the same industry, they could generate positive
spillovers for upstream local suppliers.
Trade Liberalization and GDP Growth
The relative openness of industrial countries like the United States,
compared to developing countries, and the vast differences in standard of living
between industrial and developing countries spurred initial empirical work on
possible links between trade and growth. Edwards (1993) surveys a large
number of these studies and finds evidence that, across developing countries,
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freer trade is associated with more rapid growth. However, there were no
comprehensive aggregate measures of a country’s trade restrictiveness at the
time of the Edwards study.
The most popular proxy– the ratio of exports to GDP (or total trade to
GDP)–does not necessarily reflect changes in a country’s trade policy. In
addition, higher rates of GDP growth might cause high export-to-GDP ratios
and vice versa, introducing bias into the estimation procedure. Though the
researchers suggest several ways in which trade openness could affect growth,
they do not test these links in their analyses. Edwards concludes that the two
most important areas for future research are in developing better measures of
openness directly linked to policy variables, and better models of the channels
through which trade liberalization could affect growth.
Direct links between unilateral liberalization and growth
The USITC dynamic effects study (1997) reviews a large body of work
from the 1990s that tested for a direct relationship between unilateral trade
liberalization and growth. This research analyzes average annual growth across
large numbers of countries between 1960-1990 or a time period within that
span. The sample of countries examined have a wide variation of income
levels, though most often they included only developing countries. All of these
studies made attempts to address the issues of measurement and model
specification. Some studies developed single composite indices that reflected
overall trade policy (e.g., Dollar (1992) and Sachs and Warner (1995)). Others
use multiple indicators of trade openness (e.g., average tariff rates, coverage of
non-tariff barriers, the black market premium on the exchange rate) to test
whether or not their results are influenced by the choice of openness measure
(e.g. Edwards (1992) and Harrison (1996)). Virtually all of these studies find
evidence that openness positively affected average annual growth rates,
although the strength of these results depends on the measure of trade openness
used. Often only a few measures of openness appear to be strongly related to
growth.
Harrison’s 1996 study is particularly noteworthy because it demonstrates
the serious weaknesses arising from ignoring time series data. Previous studies
had measured the openness of a country in the initial year of study. A
researcher studying growth between 1960 and 1990, for example, would use a
measure of openness calculated for 1960. But clearly many countries in the
sample liberalized trade during the long time period under examination. In
addition, the Kennedy and Tokyo Rounds occurred during that period, as well
as a number of preferential or regional trade agreements. Thus, one would not
be surprised if the openness of a country in 1960 was not related to its growth
during the following 30 years. Harrison uses data across countries and over
time, capturing changes in trade policy during this time period. Harrision’s
results show that a much larger number of openness measures had positive,
significant effects on growth than previous studies suggested.
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Edwards’ 1992 study demonstrates the importance of modeling links
between trade liberalization and growth. Edwards posits that a country’s growth
was dependent on local innovation and the rate at which the world’s knowledge
was growing. Local innovation would depend in part on the stock of
knowledge and human capital already available in the country. Countries with
very low initial stocks of knowledge would experience larger benefits from the
“catch-up factor,” access to world knowledge. More open countries would have
more access to new ideas from the rest of the world. However, it is likely that a
more educated work force would increase a country’s ability to absorb these
new ideas. Thus, Edwards suggests TFP growth would be influenced by initial
GDP per capita, openness, and human capital. He finds evidence that these
three effects were indeed significant in explaining the dispersion of growth
across countries.
The 1997 USITC study concludes that the evidence regarding links
between trade openness and growth is mixed. This conclusion is largely based
on the fact that no good single measure of openness exists, and that many of
the trade openness indicators used by researchers are not necessarily correlated
with each other (Pritchett (1996) and Lee and Swagel (1997)). Because it is not
clear a priori which indicators better capture the overall restrictiveness of a
country’s trade policy, different measures could yield very different
conclusions. The studies by Edwards and Harrison are thus important in that
they test the sensitivity of their results by using many different indicators of
trade openness. In each case they find multiple indicators that are positively
associated with growth. However, the debate on measuring openness has not
been resolved.
Rodriguez and Rodrik (1999) sharply criticize the trade and growth
evidence, due chiefly to the shortcomings of the trade policy measures,
although they also criticize model specification. They emphasize that poor
measurement of trade openness could pick up the effects of other variables,
wrongly attributing them to trade policy. In addition, correlations between trade
policy variables and other omitted macroeconomic policies could bias the
estimates of the effects of trade policy itself. A notable example is the black
market premium on foreign exchange, which Rodriguez and Rodrik show is the
key component of measures like the Sachs-Warner75 openness index.
Rodriguez and Rodrik dismiss the black market premium as consistent with a
number of different macroeconomic policies and unlikely to accurately reflect
trade policy itself. Yet there is much evidence that the black market premium
reflects distortions from foreign exchange licensing, which is often directly and
purposely linked to quotas and other nontariff barriers to trade. It is not clear
75 The Sachs-Warner index is a dummy variable indicating whether a given
economy is considered to be “open” or “closed” in a given year. See Sachs and Warner
(1995).
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that this critique can really dismiss all evidence based on poor measurement,
particularly in regressions using data with time series observations on trade
policy and a wide variety of measures of trade policy.
The most recent studies have examined evidence from both industrial and
developing countries for evidence of a link between trade openness and
growth. Edwards (1998) estimates growth over two time periods, 1960-1990,
and 1980-1990, using panel data for 93 countries, including the United States
and 21 other industrial countries. From this Edwards calculates 10-year
averages of TFP growth for each country. Using the model from his 1992
study, Edwards estimates the effects of trade openness on TFP growth itself,
with 9 alternative measures of openness or restrictiveness. Edwards finds that
openness is positively and significantly related to growth. A 1-percent decrease
in the average import tariff, for example, raises TFP growth by 0.05 percent to
0.11 percent. This significant positive relationship is robust to the use of
several of the other eight openness measures. There is also strong evidence for
a “catch-up” effect. Finally, human capital is also strongly significant and more
important in magnitude than openness for explaining total factor productivity
growth. Interestingly, Edwards finds evidence that enforcement of property
rights is an important factor in explaining this growth, whereas estimates of
other political or macro variables are not.
Greenaway et al. (1998) investigate growth in 69 countries, including the
United States and 21 other industrial countries, over the period 1975-1993.
They limit their empirical testing to three composite measures of
openness/trade liberalization, but each of these was based on multiple
indicators, such as nontariff barrier coverage, import tariffs (mean and
dispersion), black market premium, commitment to trade policy reform,
existence or absence of state monopolies in the export sector, and whether or
not the country is socialist. These indices are used to capture both the
immediate effect of trade reform and its average effect during the post-reform
period. The authors also add three new insights with respect to model
specification. First, in an attempt to capture the dynamic links between trade
openness and TFP growth, the authors specify a per capita GDP growth
function that includes investment, human capital, and population growth.
Second, they allow trade reform to have lagged effects. Third, they correct for
second-order serial correlation. Results for all three measures show a
significant positive relationship between freer trade and growth.
Greenaway et al. find that in any given year, a 1-percentage-point increase
in the trade openness measure raised per capita GDP growth by 0.005 percent
to 0.01 percent in that year, by 0.004 percent to 0.02 percent in the next year,
and by 0.002 percent to 0.02 percent two years later. All three measures
suggest that the largest effects occur one or two periods after initial
liberalization. Results also suggest that the impact of a specific trade
liberalization on growth is smaller than the impact of a country’s openness over
time.
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Frankel and Romer (1999) investigate the relationship between the volume
of trade (trade share) and income levels, rather than trade liberalization and
growth. Because of the difficulty of measuring trade openness accurately, the
authors propose measuring the geographic component of trade shares. The
authors use a gravity model to explain the trade share, which was calculated as
exports plus imports as a share of GDP. The authors also use distance and the
sizes of trade partners, measured by population and area, as explanatory
variables. This yields a geographic component of trade shares–a factor that is
not endogenous or correlated with macroeconomic variables. They then test
whether geographic trade share and trading partner size could explain the
dispersion of income levels across 150 countries, including the United States
and about 28 other industrial countries, in 1985. The authors find that the
geographic component of trade share has a large, positive and marginally
significant effect on income level. They note that the geographic component is
only one component of the effects of trade on growth; hence it is likely to
understate the effect of openness on income levels. The authors also
decompose income growth (1960-1985), and find a large and marginally
significant effect of the geographic component of trade share on per capita
income growth. A one-percentage point increase in the trade share raises per
capita income growth by about 1.3 percent.
Indirect links between unilateral and multilateral liberalization,
investment, and growth
In a sensitivity analysis of cross-country growth regressions, Levine and
Renelt (1992) find that the link between trade openness and growth was not
robust to changes in measures of openness, nor to the inclusion of varying sets
of explanatory variables. Instead, they find that freer trade strongly increased
investment, and that higher investment strongly increased growth. These results
were robust, and suggest an indirect link between trade liberalization and
growth via investment.
Recent papers by Baldwin and Seghezza (1996a, 1996b, 1997, 1998) place
greater emphasis on the indirect link between freer trade, investment, and
growth. They argue that freer trade may increase the return to capital,
generating trade-induced, investment-led growth through such channels as
reductions in the cost of imported intermediates; increased demand for
investment goods (assuming tradables are relatively capital-intensive compared
to non-tradables); and the competitive effects of investment goods, other
tradable goods, and/or the financial sector.
Baldwin and Seghezza (1996b) test the impact of trade liberalization on
average annual growth in the United States and 38 other industrial countries
between 1960 and 1989. In a significant departure from previous studies, they
posit that trade openness directly affects the rate of physical capital
accumulation, thereby indirectly affecting growth. To capture this link, the
authors use a two-equation simultaneous model of growth and investment, and
weighted average ad valorem import charges to measure trade restrictions.
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Results suggest that reductions in trade barriers at home and abroad generat
higher rates of investment, with reductions in the home-country trade barriers
having a larger impact than reductions in trade barriers abroad. Baldwin and
Seghezza’s
main finding is that a 1-percent drop in home country
trade-weighted import charges raises investment by about 1 percent, while a
1-percent drop in the foreign country’s barrier against the home country raises
investment by about 0.82 percent. A 1-percent increase in investment raised
GDP growth by about 0.24 percent. However, there was little evidence of a
significant direct link between trade liberalization and growth. These results
held for some of the alternative openness measures used.
Wacziarg (2001) analyzes growth in 57 countries, including the United
States and 20 other OECD countries, between 1970 and 1989. The author
develops a model in which trade policy affects growth indirectly. However, he
includes six channels through which this might occur–incentives for better
macroeconomic policy (maintaining stability); impact on government size;
lower degree of price distortion; higher rates of investment in physical and
human capital; increased exposure to new technology; and technology
transmission through FDI. To avoid the many problems with measuring trade
openness, Wacziarg estimates the trade policy component of the trade share.
Somewhat analogous to Frankel and Romer, the author estimates the influence
of trade policy variables (tariffs and nontariff barriers) on trade share, as well
as the influence of factor endowments and geographic variables. The estimated
coefficients on the policy variables were used as weights to construct an index
reflecting the net impact of trade policy on trade share. Like Baldwin and
Seghezza, Wacziarg estimates these effects simultaneously, using an
eight-equation system. Wacziarg’s results show that an 8.5-percent increase in
the trade policy measure (equivalent to one standard deviation) is associated
with a 0.61-percent increase in the annual growth rate. Among the eight
channels through which this occurred, investment was the most important (63
percent of the total effect), followed by technology transmission (23 percent).
Several studies explicitly examine the role of FDI in influencing aggregate
growth. The USITC dynamic effects study (1997) examines a number of these
studies, which are again based on cross-country analysis using large groups of
developing countries. These studies find evidence that increased FDI
contributes to higher aggregate growth, but that the ability of a country to
absorb these benefits depends upon its own policies and/or characteristics.
Balasubramanyam et al. (1996), for example, found that the impact of FDI on
growth was stronger for countries with relatively export-promoting policies.
Borensztein et al. (1998) argue that FDI may have a more significant effect on
growth than domestic investment, but this effect only holds if a country has a
minimum amount of human capital available. USITC (1997) also discusses
evidence suggesting that multinational firms do transfer technology and may
generate at least some positive spillovers in the host country.
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Trade Liberalization and Productivity
A number of studies of productivity utilize longitudinal micro-level
datasets, i.e., data which follow the performance of particular firms over time.
In particular, the U.S. Bureau of the Census’ Longitudinal Research Database
(LRD) is widely used in studies of U.S. firms. In their 2000 survey, Bartelsman
and Doms (2000) review many of these studies in the course of examining the
literature on manufacturing productivity in industrial countries. The LRD is a
large dataset containing information on U.S. manufacturing plants over time.
From the descriptive statistics, Bartelsman and Doms conclude that the amount
of productivity dispersion across U.S. industries is very large, and is persistent
over time; a large proportion of productivity growth is due to exit and entry
(resource reallocation); and highly productive firms today are more likely to be
productive in the future. They also observe that regulation that inhibits resource
reallocation can be detrimental to productivity growth, that productivity of an
establishment is related to the productivity of the firm that owns it, and that the
choice of technology across establishments is correlated with the level of
human capital in the establishments.
Bartelsman and Doms emphasize that it is easier to identify such stylized
facts in the micro-level data than to isolate econometrically the effects of
potential underlying determinants of productivity changes such as international
exposure, domestic regulation, ownership structure, managerial quality,
technology choice, and human capital, and that much observed variation in
individual firms’ productivity performance remains unexplained.
Global competition and the productivity of exporting and
import-competing firms
If increased exposure to global competition makes firms more efficient, one
might expect to see exporters and import-competing firms exhibiting higher
productivity than firms producing for the domestic market only. Examining the
U.S. Census LRD, Bernard and Jensen (1995) find a strong correlation between
exporting and productivity. In their 1999 study, Bernard and Jensen find that
U.S. exporting firms are 50 percent to 60 percent larger and 7 percent to 22
percent more capital-intensive than firms producing for the domestic market
only. U.S. exporting firms also had 12-percent to14-percent higher labor
productivity, and pay 9-percent to 18-percent higher wages than nonexporting
firms. The question was whether exporting itself raises firm productivity, or
whether more productive firms choose to be exporters.
Using data for more than 50,000 plants per year for 1984, 1987, and 1992,
Bernard and Jensen calculate the differential between U.S. exporters and U.S.
nonexporters with respect to wages, employment, TFP, and a number of other
factors. They attempt to determine whether exporter status helps explain these
differentials. Their results suggest that more productive firms self-select to be
exporters, and that future exporters already have desirable performance
characteristics several years prior to entering the export market. In fact, future
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exporters grow faster in the years prior to entering the export market than
future nonexporters do. Exporting appears to raise growth rates in the initial
year, but seem to have little effect on growth rates after that.
Tybout (2000) summarizes evidence found in developing country studies,
which by far accounted for the largest share of the literature on this subject to
date. He concludes that exporting firms do have higher productivity than
nonexporting firms, but again due to self-selection, with the more productive
firms selecting to export. The efficiency gap between exporting and
nonexporting firms does not seem to grow over time, suggesting that little
improvement occurs once already efficient firms have begun to export.
However, the gap grew in some firms in some industries, so longer term effects
cannot be ruled out. Recent work by Aw et al. (2000) suggests that productivity
is a critical factor in Taiwan firms’ decision to export, and that in some cases
Taiwan firms’ productivity did increase after entering the export market.
However Aw, et al. found little evidence of these effects for Korean firms.
Delgado, et al. (2002) argue that self-selection is the main determinant behind
relatively high productivity among Spanish exporting firms.
A recent study of United Kingdom manufacturing firms also provided
evidence that exporting firms are generally more productive than nonexporting
firms, and that these firms self-select–i.e., firms that are more productive
choose to enter the export market (Girma, Greenaway, and Kneller (2002)).
However, in contrast to earlier studies, Girma et al. try to compare the
performance of exporting firms to nonexporters with similar characteristics
(size, wage levels, and initial productivity level). Their results show that
exporting firms tend to have higher productivity than nonexporters, not only in
the first year of exporting, but also in the second year. Thus, exporting appears
to increase productivity growth. They also find that the degree to which
exporting affects productivity growth in the initial year depends upon the
export-intensity of the firm.
One serious difficulty in all of these studies is measurement of productivity.
Bartelsman and Doms (2000) point out that researchers usually measure the
change in the value of a firm’s output, deflated by an industry price index. If
quality improvements have taken place that are not reflected in the price
deflator, this will bias downward the estimate of firm productivity. In addition,
if there is imperfect competition in an industry and differentiated products,
prices may differ across firms. Assuming a single price deflator for an industry
will incorrectly assign higher productivity to firms with higher-than-average
prices. Finally, if firms’ choices of inputs today are affected by their
expectations of productivity in the future, some of the impact of productivity
change will not be picked up by standard TFP calculations.
Several recent studies have taken up these issues. The USITC’s dynamic
effects study (1997) reviews Harrison’s 1994 study, in which the measure of
productivity is revised to allow for market power and scale economies. This
correction leads to stronger effects of trade liberalization on productivity than
are obtained without it. Katayama et al. (2002) provide evidence that standard
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measures of plant productivity growth are biased downward owing to product
differentiation and differences in firm mark-ups. As a result, these measures
tend to underestimate the productivity of exporting firms.
Pavcnik (2002) provides evidence (from Chilean firms) that the
endogeneity between a firm’s choice of inputs and its expectations of future
productivity creates a large downward bias in the measurement of firm
productivity. Pavcnik also notes that plant closings can be a problem. Firms
that are relatively more productive today are less likely to shut down. If plant
profitability is at all correlated with investment in capital, this will introduce a
bias in the calculation of firm productivity growth. Pavcnik finds evidence of
significant bias when the correlation problem is not corrected.
Another serious difficulty is export market entry and exit. As Bernard and
Jensen (1999) note, a large amount of entry into and exit out of the export
market occurs in any given year within U.S. manufacturing. New entrants
experience the fastest growth in employment, wages, TFP, shipments, value
added, and other indicators, followed by incumbent exporters (those who have
remained in the market for at least one year). Exiting exporters show slower
growth on all indicators. Yet in Bernard and Jensen’s analysis, the determinants
of entry and exit are not accounted for when testing for a relationship between
exporting and productivity. If exiting firms are indeed less productive than
those that continue to export, a bias can be introduced in the estimated effect of
exporting on productivity.
The USITC dynamic effects study (1997) presents a detailed discussion of
studies examining the performance of import-competing firms for the United
States, other industrial countries, and developing countries. Two studies using
U.S. firm-level data and several different measures find that increased import
competition raises an industry’s efficiency, once industry concentration was
taken into account. Caves and Barton (1990) found that a one standard
deviation increase in import competition (a 10-percent increase in imports)
increase an industry’s efficiency by 0.05 standard deviations. For highly
concentrated industries, MacDonald (1994) finds that a 5-percent increase in
import share over three years was associated with a 3.7-percent increase in
annual labor productivity growth over the next three years. In addition, an
industry-level study using U.S. data from 1958-1984 shows evidence that freer
trade might cause a short-run drop in productivity, but a long-run increase
(Harrison and Revenga (1995)).
Many of the developing country studies described in the USITC dynamic
effects study (1997) also show evidence that increased import competition
raises productivity in import-competing firms. Harrison (1994), for example,
finds that firms in Côte d’Ivoire had higher levels of productivity after trade
reform, and that low-protection sectors showed higher productivity increases
than high-protection sectors. Tybout (2000) also cites evidence that protected
industries show higher productivity dispersion than nonprotected industries.
Pavcnik (2002) also discusses the question of productivity of
import-competing firms in a developing-country context. Pavcnik classified
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Chilean firms as net exporters or net importers and allowed for different
responses to trade liberalization between the two groups and finds strong
evidence that there were significant plant closings after Chile’s major trade
liberalization (1979-1986), and that a much larger proportion of these took
place in import-competing sectors than export sectors. Thus, much of the
adjustment to trade liberalization was experienced in the form of plant exit. She
finds strong evidence that aggregate industry productivity increased in six out
of eight sectors, growing the most in import-competing sectors, and the least in
non-traded goods sectors, and suggesting that exposure to global competition
does increase efficiency in import-competing sectors.
Trefler examines the impact of the U.S.-Canada FTA on Canadian firms.
Using data on more than 1,000 plants, Trefler examines labor productivity,
TFP, and many other variables before (1980-1986) and after (1988-1996) the
implementation of the FTA. One of the important innovations in this study was
that it directly examined the impact of the changes in tariffs at the industry
level, on the firms in that industry. This focus allows Trefler to see whether or
not the size of the tariff cut influences the industry’s performance. For
industries subject to large tariff cuts, Trefler finds that employment, output, and
the number of plants fell in the short run. However, these same industries
experienced very large productivity growth over the longer term.
Head and Ries (1999) address the question of potential rationalization of
Canadian industry as a result of the U.S.-Canada FTA. In principle, exposure of
domestic firms to a larger market was thought in the policy debate on the FTA
to potentially generate substantial efficiency gains through domestic
rationalization, with a smaller number of Canadian firms enjoying increased
scale economies.
Head and Ries note that data on Canadian manufacturing seem to indicate
the occurrence of post-FTA rationalization. In the 6 years following the
agreement (1988-94), manufacturing output per plant grew significantly while
the number of plants fell. Yet their tests suggest that the net effect of
US-Canada FTA liberalization on scale economies was smaller than predicted
prior to the agreement. While lower U.S. tariffs toward Canada enabled a
10-percent increase in output per plant for Canadian firms, lower output owing
to lower Canadian tariffs tended to offset this effect almost entirely. The
authors attribute the observed rise in aggregate output per plant to non-FTA
effects, such as a shift in output toward high scale industries, undercounting of
small plants in the data, and a depreciation of the Canadian dollar.
Trefler (2001), who measures short-run and long-run effects separately and
finds long-run productivity gains for Canadian firms after implementation of
the trade agreement, argues that a large part of these long run gains were a
result of reallocation of resources from less efficient plants to more efficient
plants. Pavcnik also finds that the increase in productivity experienced by
Chilean industries following a period of liberalization (1979-1986) was largely
due to reallocation of resources within industries, from less efficient plants to
more efficient plants. These results taken together suggest that firm selection
110
effects (entry and exit) play an important role in facilitating gains from trade
liberalization, with scale economies of secondary importance, if any.
Using industry-level data, Benjamin and Ferrantino (2001) evaluate
productivity growth in 13 OECD countries and 18 manufacturing sectors, with
data from the 1980s. Within individual sectors, the authors find strong
convergence effects within the OECD. Controlling for this convergence, they
find evidence of a positive relationship between low tariffs and productivity
growth, though none between import penetration and productivity growth. As
in other studies, the authors find a positive association between high
productivity growth and strong export performance.
Bernard et al. (1980) test whether or not aggregate industry productivity in
U.S. manufacturing rises as trade costs (tariffs and transport costs) fall due to
the closing of lower productivity nonexporting plants; entrance of more
productive nonexporters into the export market; and increase in output of the
more productive exporting firms. U.S. trade costs were measured for 5-year
intervals from 1977-1996. Again using the Census LRD, the authors find that a
10-percent decline in trade costs is associated with a 1.5-percent increase in
annual productivity growth rates. Declining trade costs do appear to increase
the probability of plant closure and the probability of successful entry into
exporting, though both of these results are only weakly significant.
Low-productivity plants are the quickest to shut down, and highly productive
plants that do not produce export products are the most likely to begin
exporting. A 1-percent decline in trade costs also causes exporters to increase
foreign sales by about 1 percent, though again this result is only weakly
significant.
There are a number of limitations in this work, however, which suggest the
need for more study. The authors’ results show that only a very small part of
TFP growth or labor productivity growth can be explained by changes in trade
costs and some industry characteristic dummy variables. This suggests that
there are omitted variables that explain a large part of the productivity variation
across U.S. manufacturing plants. In estimating the probability of plant closure,
the authors use plant labor productivity, exporter status, and change in trade
costs as determinants. Yet their first test and a subsequent test reveals that these
three variables influence each other, calling into question the reliability of the
results. In addition, the questions of plant closure and of entry into the export
market appear to call for some kind of duration model, since plant survival in
the last period is contingent on plant survival in the first period, and only a
plant that survives can become an exporter.
Reductions in price distortions and production costs
Trade liberalization means domestic firms face increased foreign
competition, which makes it more difficult to maintain monopoly power in a
market, and thus should result in lower price-cost margins, and expanded
output–the “imports as discipline” hypothesis. In addition, access to the global
market could lower production costs through economies of scale, or cheaper
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imported intermediate inputs. While the effect of freer trade on productivity via
these channels is important for both industrial and developing countries, it is
likely to be larger in countries with small domestic markets. Tybout notes that
several studies provide evidence to support the imports-as-discipline
hypothesis. For example, both Harrison (1994) and Levinson (1993) find
evidence that the more highly protected firms had higher price-cost markups,
and some evidence that these mark-ups fell with trade liberalization in Côte
d’Ivoire and Turkey. Krishna and Mitra (1998), incorporating flexibility in
returns to scale in their analysis, find strong evidence that India’s 1991
liberalization reduced price-cost margins in a variety of Indian industries.
Because explicit trade policy measures are not used in these studies, however,
it is possible (as Tybout notes) that these results capture other effects, such as
exchange rate appreciation, or reflect falling relative import prices rather than
reductions in market power.
In a recent study, Kim (2000) tests for the impact of trade liberalization on
productivity of Korean firms, via its effects on price-cost markups and scale
efficiency. Using data on 36 manufacturing sectors, Kim calculates TFP for
eight periods between 1966 and 1988. The author then estimates a modified
form of the production function, which incorporates the possibility of imperfect
competition and increasing returns to scale, as well as interactions between
these characteristics and trade policy. In contrast to the earlier studies that used
binary variables to represent post-liberalization periods, Kim uses three
alternate measures of trade policy (tariffs, quota coverage, and the price gap
between goods sold domestically and those sold internationally). Kim find
strong evidence that Korean firms are imperfectly competitive, and display
increasing returns to scale. Although tariffs appear to be unrelated to TFP
growth, reductions in quota coverage and reductions in price gaps significantly
increase TFP growth. In addition, reductions in quota coverage significantly
reduce price-cost markups and increase scale efficiency.
FDI, technological spillovers, and firm productivity
Trade liberalization typically involves liberalization of FDI as well. Many
have argued that sectors with relatively high levels of FDI might show
relatively high productivity, due to technological spillovers from the foreign
firms. Evidence from firm-level studies appears to be mixed. Doms and Jensen
(1998) find that foreign-owned firms in the United States have 2.3-percent to
3.7-percent higher TFP than domestic-owned firms. When comparing foreign
multinationals to U.S. multinationals, they find that U.S. multinational firms’
domestic plants are the most productive, but that foreign-owned firms are more
productive than U.S. domestic firms with no overseas assets. While this
evidence supports the idea that firms that invest abroad have relatively higher
productivity, it does not directly test for evidence of spillovers from these
foreign firms to the domestic counterparts in the same sector.
Studies that examine industrial and developing country FDI in specific
developing countries show evidence that FDI brings with it more efficient
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technology, but the evidence on diffusion is mixed. Haddad and Harrison
(1993) find foreign-owned firms to be more productive than their domestic
counterparts, and firms in industries with a relatively high multinational
presence to be more productive than firms in other industries, in Mexico and
Morocco. Aitken and Harrison (1999), using Venezuelan plant-level data, find
that foreign equity participation is positively correlated with plant productivity,
though only for small firms. However, higher multinational presence is
associated with less productive domestic-owned firms. As Tybout and the
authors note, this may be because the multinational firms bid up the cost of
skilled workers and/or attract demand away from local competitors. The
authors conclude that some of the positive association between productivity
and multinational presence is due to the tendency for multinationals to invest in
the relatively productive sectors, and that benefits from this investment do not
spill over to domestic-owned firms, but are internal to the joint venture.
More recently, Smarzynska (2002) tests for FDI spillovers using Lithuanian
firm-level data. As in Pavcnik, Smarzynska calculated TFP growth correcting
for endogeneity between expectations of future productivity and the firm’s
choice of inputs today. Smarzynska introduces two innovations in the study.
First, she looks for evidence of spillovers within the industry and at other
points in the production process. Second, she investigates whether spillovers
are both local and regional. She finds evidence that suggests the presence of
spillovers between foreign affiliates and their domestic upstream suppliers, but
no evidence of spillovers between firms in the same industry. Local firms
appear to benefit from spillovers in their immediate region as well as from
spillovers from other parts of the country. While type of foreign ownership
appears unimportant, foreign firms producing for the local market appear to
generate greater productivity benefits than those producing for export.
Conclusion
A wide variety of evidence now points to an association between trade
liberalization and faster rates of economic growth, both in the United States
and abroad. When research focuses on particular causes of economic growth,
such as increased investment or accelerated productivity gains through
technological change, evidence for the linkage between freer trade and more
rapid growth Methodological improvements have diminished somewhat early
skepticism about the robustness of the trade-growth connection.
In the case of productivity gains, many studies find that causation runs
from productivity to exports rather than vice versa, so that firms which become
more productive choose to export. There is also relatively strong evidence that
exposure to trade causes industry output to shift from less-productive to
more-productive firms, and some industry-level evidence for higher rates of
productivity growth in industries exposed to import competition or trade policy
liberalization. Evidence of direct links between trade liberalization and scale
economies remains harder to identify.
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Effects on Labor Outcomes
Over the last three decades, reductions in U.S. tariffs and increased trade
volumes have coincided with growth in the gap between wages paid to skilled
and unskilled workers in the United States. For example, the ratio of wages for
nonproduction to production workers in the U.S. manufacturing industry
increased 16 percent between 1977 and 2000 (figure 3-5 in the previous
chapter).76 In addition, between 1975 and 1999 the mean real earnings of
workers 18 years old and over increased by 47 percent for those with an
advanced degree while those with no high school degree decreased by 6
percent (figure 3-6). A sizable economic literature has sought to better
understand the degree to which trade in general, and trade policy in particular,
has contributed to the growing wage gap.
Studies that evaluate trade policy changes generally find little or no
measurable impact on U.S. labor market outcomes. For example, Haskel and
Slaughter (2000)77 model the share of price changes resulting from trade policy
changes, and their estimates suggest that tariff changes in the 1970s and 1980s
had no significant impact on the wage premium. In addition, most studies of
NAFTA and the U.S.-Canada FTA find that these agreements had little or no
effect on U.S. labor market outcomes.
Studies of displacement of individual workers in trade-sensitive industries,
in general, find that although import-competing displaced workers’ experiences
are similar to non-import-competing displaced workers, import-competing
displaced workers are slightly older, more likely female, and slightly less likely
to be re-employed. Depending on the source data, geographic coverage, and
sample period, findings differ on the effect of displacement on subsequent
earnings if re-employed. Relatively few studies, however, evaluate a direct link
between trade policy changes and job displacement or wage inequality. This
section also reviews a growing literature on the transition costs associated with
adjustment of labor.
A considerably larger literature investigates the impact of changes in the
level and composition of U.S. trade on labor market outcomes. While these
studies make no direct link to trade policy changes or to specific trade
agreements, their conclusions can offer insight into the effects of trade on the
U.S. economy. Most of these studies suggest that increased trade has
contributed to growing inequality in wages. Other economic forces, however,
such as rapid technological change, appear to have had a greater impact than
trade. Consensus estimates suggest that approximately 10 percent to 20 percent
of the growth in the wage gap should be attributed to changes in international
76
For a discussion of the use of production activity as a proxy for worker skill level,
see Feenstra and Hanson (2001), footnote 4, pg. 3.
77 Haskel and Slaughter (2000) p. 16. In checking for robustness, they concluded,
“all checks yielded the same qualitative finding: mostly insignificant mandated changes
in the U.S. skill premium.”
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trade. These studies are reviewed in the next section, along with a variety of
studies that reach conclusions different from the consensus view.
Economic Theory
The best-known statements from trade theory about wages come from the
Heckscher-Ohlin model, a widely-used workhorse of academic theory.78 This
model, in its simplest form, describes a situation with two countries, two
goods, and two factors or inputs into the production process. The two factors
are usually described as labor and capital, and can also be usefully thought of
as skilled labor and unskilled labor. The model requires stringent assumptions
including identical technology and tastes, homogeneous products, two goods
produced by two factors (or more generally, n factors and m goods),
incomplete specialization, and constant returns to scale. A main result of the
model, the Stolper-Samuelson theorem, describes long-run results of trade
where factors of production are completely mobile, such as the liquidation and
redeployment of capital or the training of labor.79
The Stolper-Samuelson theorem, which links product prices to factor
prices, has also assumed importance in the debate on trade and wages (Stolper
and Samuelson (1941), pp. 58-73)). This theorem explains what happens when
a country faces altered relative prices for its exports and imports. These
alterations can occur when a tariff is imposed or removed or when other
fluctuations in world markets alter the terms of trade. When the relative price
of one good increases, the economic returns will increase for the factor that is
78 For a basic discussion of the Heckscher-Ohlin model, see Krugman and Obstfeld
(2000), pp. 66-91, 729-731; Caves et al. (2002), pp. 107-128, S-23 - S-27; and Markusen
et al. (1995), pp. 98-126, 445-451. For more detailed explanations, see Bhagwati et al.
(1998), pp. 53-90, 107-130; and Wong (1995), pp. 23-138. Wong intermingles the
treatment of the Ricardian, Heckscher-Ohlin and specific factors models.
79 Another result of the Heckscher-Ohlin model is the Factor-Price Equalization
Theorem, which states that if countries that share the same technology engage in
international trade, and if trade equalizes prices, then the rewards to labor and capital (or
skilled labor and unskilled labor) will be equalized in the trading countries. The
implication for advanced countries like the United States, which is relatively more
skilled-labor abundant, is that free trade would cause the wages paid less-skilled workers
to fall to an absolute international level and increase wages of less-skilled workers in
developing countries. This theorem is consistent with the popular notion that free trade
would cause U.S. less-skilled worker wages to fall to the much lower world average
wage. Conditions in the real world, however, diverge sharply from the strict theoretical
assumptions required for the Factor-Price Equalization Theorem to hold, such as
international differences in technology, the tendency of consumers to prefer goods
produced in their home countries, transport costs, and scale economies. Nonetheless, the
tendency for trade liberalization to cause at least some price convergence across
countries means that in principle, some associated wage convergence takes place as well,
with the amount and speed of such convergence being a matter for empirical
investigation.
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more intensely used in the production of that good. The economic returns to
the other factor will decline. For example, if the relative prices of goods
using mostly unskilled labor decline relative to the prices of goods using
mostly skilled labor, then the wages of unskilled labor should fall relative to
the wages of skilled labor, and vice versa. Consequently, changes in
international trade or trade policy that affect relative wages should be evident
in concomitant changes in relative prices of goods. The implication for
advanced countries, such as the United States, which is relatively
skilled-labor abundant and would witness a relative decline in unskilled-labor
intensive product prices, is that trade liberalization would decrease the real
wage of less-skilled labor.
The Heckscher-Ohlin model assumes that workers in all industries earn the
same wage at any point in time, and similarly that capital in all industries earns
the same rate of return. A corollary of this is the prediction that if trade
liberalization leads to lower relative prices for unskilled-labor-intensive goods,
all affected workers tend to oppose that liberalization, while all owners of
capital (or skilled workers) tend to support it. In reality, proposals to raise the
price of imports tend to be supported actively by both workers and firms in the
industry involved. Workers in other industries with similar skill sets and
educational levels generally have little comment, positive or negative, about the
policy changes. This outcome occurs because workers in different industries
are in fact different, as is capital equipment used in different industries. These
facts are reflected in the specific-factors model, which focuses on the differing
experiences of workers across industries as trade is liberalized.80 As mentioned
above, the Heckscher-Ohlin model assumes that factors are completely mobile,
whereas the specific-factors model assumes that some factors of production are
tied to a particular industry and cannot move at all. If trade liberalization leads
to increased imports, and the price falls for domestic goods that compete with
those imports, capital or labor resources in the import-competing industry that
cannot move receive lower rates of return, while immobile resources in the
expanded export industry receive higher rates of return. The specific factors
model explains why the views of workers and firms about trade liberalization
tend to be influenced relatively heavily by industry type, rather than by the
particular assets or skills that those firms or workers possess.
The situation in actual labor markets represents an intermediate position
between that represented by the Heckscher-Ohlin model, in which workers can
move freely between industries without any change in wages, and the limited
labor mobility of the specific factors model. The compensation of workers
reflects in part specific job skills or “human capital” acquired in the industries
and firms for whom they work. A significant portion of these skills are
80
For expositions of the specific-factors model, see Krugman and Obstfeld (2000),
pp. 37-65 and pp. 723-728; Caves et al. (2002), pp. 91-106, and pp. S-17 - S-22;
Markusen et al. (1995), pp. 127-141 and pp. 452-464; Bhagwati et al. (1998), pp. 91-106
ff.; and Wong (1995).
116
industry-specific, and thus are not worth as much when the worker changes
jobs or industries. Other skills are more universally useful. If market
conditions generate new opportunities, workers may actually find that their
skills are worth more in a different job or industry, and change jobs for that
reason. Thus, some workers will move from industry to industry depending
on the market forces affecting those industries, but may experience
significant costs, such as reduced wages, if their skills are firm or industry
specific. This means that labor markets create significant incentives for
workers to remain in their current jobs. Workers generally move from one
industry to another only when market conditions change. These changing
conditions may be positive, as when better job opportunities arise, or
negative, as when jobs are lost in a certain sector.
In summary, international trade theory predicts that for a country such as
the United States, rich in physical and human capital, and which has
traditionally placed import restrictions on goods made with less-skilled labor,
trade liberalization may lower the returns to less-skilled labor. This prediction,
though useful, is made under a simplified set of assumptions that abstract from
the rich variety of phenomena occurring in actual labor markets.
Empirical Studies of Wage Inequality
Since the 1970s, there has been a steady rise in the wages of more-skilled
U.S. workers relative to the wages of less-skilled workers, and increasing
income inequality. This trend is apparent whether workers are compared by
education, occupational category, or other proxies of skill, or whether income
inequality is measured by wages, family income, or poverty levels. For
example, wages of college graduates were approximately 38 percent higher
than those of high-school graduates in 1979, but were 63 percent higher in
1993 (Burtless (1997)). In 1985, median weekly earnings of males working full
time in managerial and professional specialty occupations were 79 percent
higher than for operators, fabricators, and laborers; by 2000 they earned 104
percent more.81
Although there is a general consensus that increasing inequality has been
driven by declining demand for less-skilled workers resulting in an increasing
skilled-wage premium, the sources of this demand shift and growing wage gap
are still at issue. Two commonly cited causes are increased international trade,
or more accurately increased competition from low-wage or developing
countries, and technological change. Increased imports of goods produced with
less-skilled labor might have pushed down the relative wage of such labor,
particularly if such imports pushed down the relative price of such goods.
Alternately, technical change may have increased the demand for intellectual
labor relative to manual labor, for example, for computer skills relative to
81
USITC calculations using Bureau of Labor Statistics data.
117
mechanical skills. This could account for the change in relative wages even
in the absence of influences from international trade.
Katz and Autor provide a comprehensive discussion of recent changes in
wage structure and a review of various explanations.82 The authors cite three
main explanations for increasing inequality: (1) an increased growth rate of
the relative demand for highly educated and more-skilled workers driven by
skill-based technological changes, (2) rising globalization pressures in reducing
manufacturing production employment and thereby shrinking the relative
demand for the less educated, and (3) a slowdown in the rate of growth of the
relative supply of skills and an increased rate of unskilled labor immigration.
Katz and Autor used a supply-demand-institution framework to assess these
three primary explanations. They found that, “Substantial secular increases in
the relative demand for more-educated and more-skilled workers appear
necessary to explain . . . the evolution of the wage structure,” and
within-industry skill upgrading “appears to be the major driving force in the
rise in the relative demand for the more skilled.”83 The authors added that
skill-biased technological change appears to be a key factor and is somewhat
more important than international trade changes.
A prevalent method of understanding the various analyses is to categorize
studies based on the type of data employed, product price or trade volume.
Arguing from the Stolper-Samuelson theorem, if imports of
unskilled-labor-intensive goods depress U.S. wages of unskilled labor, the
relative prices of such goods should be falling. Some studies suggest that
relative prices of unskilled-labor-intensive goods in the United States have not
fallen (Lawrence and Slaughter (1993)). In light of the Stolper-Samuelson
theorem, this finding can then be interpreted as meaning that increased imports
have had minimal effect on the wages of unskilled labor. Studies of this type
usually conclude that most of the increase in the skilled-wage premium is due
to technological change. For example, Slaughter’s 1998 review of the literature
found that, in general, product-price changes explain very little of rising
inequality. Also, Harrigan (2000) analyzed the role of prices and finds that the
direct impact of import prices on wages is negligible. In reviewing nine
price-based studies, Slaughter found that the results are relatively sensitive to
the selection and weighting of industries sampled and to the decade considered,
whereas the results are relatively insensitive to the extent of data aggregation
and skills measurement choice (Slaughter (2000)). The treatment of certain
industries, such as computers for which appropriate price measures are
problematic, can significantly affect study results (Sachs and Shatz (1994)).
82 For a general overview of historic changes in wage structure and inequality, see
Katz and Autor (1999). See also Feenstra (2000).
83 Katz and Autor (1999), p. 1539.
118
Several criticisms have been made of studies that use product prices to
infer the effect of trade on wages. A common critique is that unskilled and
skilled labor may not be well-measured by proxies such as production and
nonproduction workers. Also, price-based studies ignore other factors that shift
prices such as change in consumer demand/taste, increasing per capita income,
and falling real value of minimum wage. Another concern with price-based
studies is that other features of the world changed at the same time as product
prices. In particular, the U.S. supply of college graduates relative to
less-educated workers has increased in recent decades. The results of such
studies can be sensitive to various model specifications.84 In a recent study,
Haskel and Slaughter (2000) disaggregated the share of price changes resulting
specifically from trade policy changes. This approach allowed the authors to
address two common criticisms of price-based studies. The first criticism is
that many studies model the United States as a small country or price taker,
and the second is that studies implicitly assume that all domestic product price
changes are due to trade policy or do not directly link the share to trade policy
changes. Haskel and Slaughter, however, segregated domestic and international
determinants of price changes in order to assess the effect of trade-induced
price changes. They analyzed the sector bias of price changes induced by
changes in U.S. tariff and transportation cost reductions during the 1970s and
1980s. Based on various estimations, they did not find strong evidence that
falling tariffs and transportation costs mandated rises in inequality working
through price changes. In addition, although the authors documented that tariff
and transportation reductions during the 1970s and 1980s were concentrated in
unskill-intensive sectors, these reductions were likely not large enough to
greatly affect prices (Haskel and Slaughter (2000)).
Other studies, also known as factor-content studies, attempt to explain
changes in relative wages by changes in import volumes rather than changes in
product prices. In this approach, traded goods are considered to embody the
labor they contain, with imports representing an addition to the supply of U.S.
labor (thus depressing wages) and exports representing a reduction in the
supply of U.S. labor (thus increasing wages). The effect of imports is thus
analogous to the effect of immigration. Some studies attempting to infer
changes in relative wages from changes in import and/or immigration volumes
have estimated relatively high wage effects (Borjas, Freeman and Katz (1997))
while others estimated much smaller impacts (Katz and Murphy (1992), Borjas
and Ramey (1993)). For example, Borjas, Freeman, and Katz estimate that 40
percent of the increase in the log wage ratio between all other workers and
high school dropouts can be attributed to the increased relative supply of
dropouts from trade and immigration; while Katz and Murphy (1992) find that
“the effects on relative labor demands of trade were quite moderate,” and
84
For an example of critiques of price-based studies, see William R. Cline (1997),
pp. 90-92.
119
estimate that “changes in trade caused a reduction of 0.63 to 1.48 percent in
demand for male high school dropouts and a reduction of 2.22 to 4.00
percent for female high school dropouts.”85
Some of the highest and most controversial estimates assume that imports
from developing countries in effect embody the much larger quantity of labor
that is actually used to make the goods in developing countries.86 Such
methods attribute nearly all of the relative decline in U.S. wages of unskilled
labor to international trade. One criticism of factor-content studies is that they
treat changes in the production of goods as output shocks that affect
employment at existing wages. But if wages adjusted rapidly with import
penetration it would reduce the labor cost competitiveness of imports and
reduce import flows, leading to a possible underestimate of labor/wage effects
(Freeman (1995)). In addition, factor-content studies tend to ignore how
demand for output may respond to changes in prices. By ignoring potential
consumer response, these studies may overstate import displacement of local
production and ensuing labor/wage estimates.87
In a series of papers, Leamer considers the impact of increases in imports
of less-skilled-labor intensive goods on the U.S. wage distribution.88 These
papers took advantage of the relationship between high wages and high effort,
as measured by hours worked. Weekly wages and weekly hours worked are
correlated strongly since at least 1970, and high wage-high effort jobs tend to
be concentrated in capital-intensive industries. By lowering the relative price of
low-wage, low-effort jobs, Leamer argues that increased imports of
less-skilled-labor intensive goods affect the distribution of wages throughout
the economy, including for the large majority of U.S. workers employed in
services, and not only in import-competing manufacturing industries. In
85
Borjas et al. (1997) and Katz and Murphy (1992).
This approach is associated with Wood (1994). A more recent estimate of this
type is Kucera and Milberg (2002). This study used a counterfactual factor-content
analysis to measure the employment effects of manufacturing trade expansion over
1978-1995 for 10 OECD countries, including the United States. The authors concluded
that the United States experience net loss of 2.0 million manufacturing jobs, representing
a 9.9-percent decline in manufacturing labor demand (as a percent of the average
manufacturing employment for the 1978-1995 period). They also concluded that most of
the net loss is accounted for by trade with non-OECD countries (US: 1.29 million of
2.03 million is accounted for by non-OECD trade); that most of the net loss is
concentrated in relatively labor-intensive industries; and that deindustrialization (decline
in manufacturing share of employment) is more highly correlated with the employment
effects from trade with OECD rather than non-OECD countries. They also noted that “to
the extent trade is the culprit, it is the employment effects of North-North trade that most
closely track the overall change in the manufacturing share of employment in each
[OECD] country.” (p. 8.)
87 Freeman (1995), p. 27.
88 For example, Leamer (1999) and Leamer and Thornburg (2000).
86
120
testimony before the U.S. Trade Deficit Review Commission, Leamer
indicated that in contrast to the academic consensus that trade does not
matter much for relative wages or the loss of manufacturing jobs, he viewed
the evidence as “not compelling in either direction.”89
Outsourcing and wages
More recently, researchers have paid increasing attention to the possible
effect of the global disaggregation or fragmentation of the production process
on wages. Feenstra and Hanson (2001) provide a comprehensive survey of
studies analyzing international production sharing and its effect on wages.
Trade in intermediate inputs, labeled as “outsourcing” or “global production
sharing”, involves relocating low-wage, low-skilled parts of a vertically
integrated production process overseas (e.g. manufacture of components) while
retaining high-wage, high-skilled operations in the home country (e.g. final
assembly, R&D, or headquarters functions), and shipping the components to
maintain coordination of production.90 The authors argue that trade in
intermediate inputs is a potentially important explanation for the increasing
wage gap. They show that both trade in inputs and skill-biased technical
change will shift demand away from low-skilled activities and raise relative
demand for higher skilled labor.
The authors argue that recognizing the increase in outsourcing helps to
resolve several of the empirical arguments to support the contention that
international trade does not have much effect on U.S. wages, including (1) the
relatively small magnitude of trade flows between the United States and
developing countries, (2) the apparently contradictory movement between
import prices and relative wages, and (3) the fact that changes in employment
shares by skill level primarily take place within industries, rather between
industries as one would expect if Stolper-Samuelson forces were linking
imports to wages.
On the first point, the ratio of trade to GDP understates the increasing trade
intensity of the U.S. economy because of the increasing share of services in
GDP. A more appropriate measure, the ratio of merchandise trade to
merchandise value-added, has trended upward significantly over time for the
United States, rising from 13.2 percent in 1913 to 35.8 percent in 1990. The
estimated share of imported intermediate inputs to manufacturing has almost
doubled from 1972 to 1990, rising from 6.5 percent to 11.6 percent of total
intermediate purchases (Feenstra and Hanson (1999)). Advanced economies
other than the United States also engage in outsourcing. Second, when prices
are compared within industries rather than across industries, the authors find
89 January 21, 2000, p. 60. Downloaded at
http://www.ustdrc.gov/hearings/21jan00/p07012100.pdf on May 7, 2003.
90 Evidence on outsourcing as observed in the Section 9802 production-sharing
program, and its economic effects, is discussed in Feenstra et al. (2000).
121
that domestic prices are increasing relative to import prices. This trend is
consistent with foreign outsourcing, and unlike similar price comparisons
based on cross-industry comparisons (e.g. Lawrence and Slaughter (1993)),
this method can be used to support a claim that lower import prices are
associated with a relative fall in the less-skilled wage. The presence of
outsourcing also can explain the relatively large share of the shift toward
more-skilled or nonproduction labor that occurs within industries. Rather than
attribute this phenomenon entirely to skill-biased technological change,
relocation of the less-skilled jobs through outsourcing and importation of the
components can account for many of the changes in the observed data even
with technology remaining constant.
Estimates of the effects of outsourcing on the relative wage of
nonproduction and production workers are sensitive to choices in econometric
methodology, and the choice between outsourcing and technological upgrading
as explanations for the increased wage premium is not yet entirely resolved.
Feenstra and Hanson (1999) consider the period from 1972-90, during which
the average increase in U.S. nonproduction wages relative to production wages
was 0.72 percent per year. A simple analysis attributes 15 percent of this
increase (0.11 percent per year) to outsourcing, but this estimate increases to 30
percent (0.25 percent per year) if increased computer use rather than
outsourcing is considered to be the structural cause. Analyses allowing for
interactions between the explanatory variables and quantities of labor and
capital attribute 40 percent of the relative increase in wages to outsourcing
(0.29 percent per year), but alternately attribute 75 percent of the increase (0.56
percent per year) to increased computer use.
Agreement-Specific Analysis
There exist few studies and reviews that investigate the specific effects on
labor markets of the five agreements identified in this report. A 1997 USITC
statistical analysis of NAFTA identifies effects (positive or negative) on
employment for 20 of the 120 disaggregated industries reviewed, of an
absolute magnitude of negligible to 15 percent in either direction. These sectors
account for approximately 3 percent of the total labor force and 17 percent of
the manufacturing labor force (USITC (1997a)). Elsewhere, Ferrantino (2001)
argues, “the effects of NAFTA on the U.S. economy have been relatively
small,” and have minimal impact on overall levels of unemployment. Using
new unemployment insurance claims as a benchmark, Ferrantino estimates that,
“the highest available estimates of NAFTA job loss attribute no more than 0.5
percent of U.S. layoffs to NAFTA. On an economywide basis, job ‘creation’ or
‘destruction’ of this magnitude is relatively small compared to the amount of
fluctuation in employment levels over the business cycle.”91
91
122
Ferrantino (2001), pp. 4-5.
Two recent studies of NAFTA and the U.S.-Canada FTA conclude that
trade-induced wage effects are more likely to occur in the economies of the
United States’ smaller trading partners than in the larger U.S. labor market. In
an econometric analysis of the North American labor market, Robertson uses a
three-region labor supply-demand model with 1987-1997 household-level data
from the United States and Mexico to examine labor market integration,
concluding that, although there is a large wage differential between the United
States and Mexico, the labor markets are closely integrated, and that evidence
of this integration precedes NAFTA and may be largely the result of migration
(Robertson (2000), p. 742). Robertson’s method is designed to analyze changes
in the Mexican labor market. By assuming that the larger U.S. labor market
drives such changes, he is precluded from analyzing NAFTA’s effect on the
U.S. labor market directly.1 In a recent study, Trefler (2001) analyzes the
short-run costs and long-run efficiency gains of the U.S.-Canada FTA, but does
so only from the Canadian perspective. In testing for the endogeneity of U.S.
employment, output, value added, and number of plants, however, Trefler
concluded that the effect of the FTA was swamped by more fundamental
movements in industry demand and supply.
Non-Agreement-Specific Analysis
A number of econometric studies have attempted to identify the relative
influences of U.S. or developed country trade and technology changes in
increasing the relative wages of skilled workers over the past two decades.
Although these studies have used a variety of methodological assumptions
about the linkage between trade and wages, studies and literature reviews
spanning the last 15 years have generally found that trade accounts for a
relatively small amount of the changes in wage and income distribution of
developed countries. In an early review of the literature, Freeman (1995, p. 25)
found that, “Standard factor content analysis studies indicate that trade can
account for 10 to 20 percent of the overall fall in demand for unskilled labor
needed to explain rising wage differentials in the United States or rising
joblessness in Europe.” Later, a comprehensive literature review published by
1 Robertson treats Mexico as a small country and the United States as a large
country, consequently invoking the assumption that Mexico is too small to affect
aggregate wages in the United States. After controlling for exchange rate movements, the
rate of wage convergence slows after NAFTA, and Robertson posits a possible
explanation in that if migration is the primary vehicle in labor market integration,
increasing opportunities for Mexicans within Mexico as a result of NAFTA may help to
explain the reduced convergence rate. (p. 744) Robertson qualifies that it is too early to
evaluate the complete effect of NAFTA on labor-market integration because with the
1990 announcement, actors may have changed their behavior before, during or after
NAFTA; full provisions will take 15 years to enter, with the most controversial slated for
later; and the December 1994 peso collapse triggered a recession that may mask the
responsiveness of Mexican wages to changes in U.S. wages. (p. 763).
123
the Institute for International Economics (Cline (1997)) concluded that
proponents exist at both extremes. Wood (1994) attributed all of rising
inequality to trade, while Berman et al. (1994), Bound and Johnson (1992),
and Lawrence and Slaughter (1993) attributed almost no causation to trade.
The Institute for International Economics’ review found that “The majority
view attributed rising wage inequality primarily toward skill-biased
technology change (ibid., pp. 15 and 139).”
After surveying almost 30 economic estimates of the impact of trade on
rising U.S. wage inequality, Cline (1997, p. 144) concludes that international
influences contributed about 20 percent of the rising wage inequality in the
1980s. A recent International Monetary Fund literature review concluded that
trade accounted for only about 10 or 20 percent of the changes in wages and
income distribution in the advanced economies (Slaughter and Swagel (1997),
p. 3) More recently, Slaughter (1998, p. 452) reviewed research on the effect
of international trade on labor markets and found that, “Despite unresolved
methodological differences, the current consensus is that trade accounts for a
positive yet relatively small share of rising inequality.”
New insights into the experiences of displaced workers and their
relationship to international trade have been obtained from the analysis of large
microeconomic data sets on individuals and households. Much of this work is
reviewed in USITC (2002). Briefly, Kletzer (2001) finds that workers displaced
from jobs in import-competing industries are approximately equal in
educational attainment and job tenure, slightly older, and significantly more
likely to be female. Relative to other displaced manufacturing workers, those
displaced from import-competing industries are slightly less likely to be
reemployed as of the survey date, in part due to the lower re-employment rates
of displaced females. Their subsequent earnings are similar to those of other
displace manufacturing workers, with about 36 percent of such workers
reporting earning the same or more on their new jobs and 25 percent of such
workers reporting earnings losses of 30 percent or more.93
The USITC analyzed the possible labor efforts of simultaneously removing
U.S. import restraints, including tariffs and most quantifiable nontariff
measures94 The USITC model results showed that if all significant U.S. import
restraints had been unilaterally removed in 1999, approximately 175,000
full-time equivalent (FTE) workers would have been displaced from their
current industries and would need to seek employment in industries other than
those being liberalized. Approximately 155,000 of these FTE workers would
93
Kletzer (2001), table 3-3, p. 36.
USITC 92002), chapter 2,. While this analysis is in fact an ex ante analysis of a
hypothetical liberalization rather than an expost analysis of an actual one, and thus
methodologically similar to the CGE analyses reviewed earlier in the chapter it is
discussed at this point in order to highlight its implications for labor transition.
94
124
have been in the textile and apparel sectors. Based on the experience of
similar workers surveyed for the U.S. Department of Labor’s Bureau of
Labor Statistics, the estimated one-time increase in workers receiving
unemployment compensation as a result of removing all significant import
restraints is approximately 111,000, equal to about two days’ worth of new
claims. This estimate took into account the fact that workers in the affected
industries are significantly more likely to receive unemployment insurance.
Overall, the measurable effect on aggregate U.S. unemployment of removing
all significant U.S. import restraints on a phased-in basis, rather than
simultaneously, likely would be too small to measure. About 17,000 net
additional FTE workers would be drawn into the labor market nationwide as
a result of removing all significant import restraints.
Conclusion
The changes in less-skilled wages and income inequality paralleled a trend
toward increasing trade, particularly with less-developed countries, leading
many observers to attribute these wage changes, and the concomitant
displacement of workers, to international trade. These views found a foothold
in economic theory, and the debate led to a flowering of studies attempting to
quantify the impact of trade liberalization on wages and income. The broad
thrust of these studies and the literature is that changes in technology and
educational patterns probably drive most of the recent changes in the U.S.
income distribution, with changes in international trade playing a secondary but
non-trivial role. While growing trade volumes appear to have had an impact on
the wage distribution, there is little evidence that trade policy changes have
been responsible for significant changes in the wage distribution.
Effects on Product Variety
There are more than 17,000 statistical reporting categories in the
Harmonized Tariff Schedule, and the United States had more than 200 trading
partners in 2001.95 For purposes of analytical simplicity, economists and other
trade policy analysts frequently ignore much of this detail by aggregating
across countries and products. While aggregation may be a helpful abstraction
for many trade policy questions, assessments of product level data can provide
some valuable insights into the changing nature of international trade. This
section reviews the academic literature on increasing product variety in
international trade.
The literature establishes an important fact: a significant portion of the
trade growth over the last three decades can be attributed to growth in the
95
USITC calculations using data downloaded from International Trade Resources
web page
http://www.macalester.edu/research/economics/PAGE/HAVEMAN/Trade.Resources/
TradeConcordances.html, downloaded Nov. 13, 2002, and U.S. Commerce dept data.
125
number of import sources per commodity. Countries trade more products and
with a larger number of countries than in the past. Growth in the number of
product-country pairs, particularly the number of products imported from low
wage countries, constitutes a sizable portion of the growth in U.S. and global
trade.96 While the emergence of a new product-country pair may in many
cases represent importation of an old commodity from a new source, data
gathered in this fashion may at least form a useful initial proxy for the extent
to which increasing trade is accounted for by product differentiation.
Hummels and Klenow (2002) point out that the value of a given aggregate
trade flow can be understood as the product of the number of products traded
and the average value per traded product. Hummels and Klenow argue that
changes in the number of products traded have substantially different economic
consequences than changes in the average value per traded product. Growth in
the number of imported products can indicate that consumers and intermediate
goods buyers in the United States have access to a wider variety of goods.
Following Romer (1994) and Feenstra (1994), Hummels and Klenow argue that
the economic gains from growth in the number of imported products can be
quite large, relative to estimates of the gains from trade that ignore this
dimension.
Schott (2001) investigates changes in the sourcing pattern of U.S. imports
at the product level over the period 1972-1994. He divides the world’s
countries into three groups, according to their per capita income: high, middle
and low.97 He finds a substantial decrease in the number of manufactured
products that the United States imports exclusively from high income countries.
Much of the growth in manufactured imports over the period occurs in product
categories in which at least one low income country enters the U.S. market.
While the share of U.S. imports from low income countries remains small
(only 8 percent of U.S. import value in 1994), growth in the number of
categories with low income exporters suggests that a growing share of U.S.
industries face price competition from low-income countries.98
Hillberry and McDaniel (2002) use the Hummels and Klenow methodology
to decompose growth in North American trade flows since NAFTA. Using data
96
The emergence of new traded products over time has also been identified as a
possible source of upward bias in the import price index. This in turn implies that
published estimates of the income elasticity of import demand may also be
upward-biased. See Feenstra and Shiells (1997).
97 Countries with per capita incomes of in the 30th percentile or less are considered
low. Countries with per capita incomes in the 30th to 70th percentiles are middle income,
and countries with incomes in the 70th percentile or higher are considered high income.
98 Schott also notes sizable disparities between price of goods from low income and
high income countries. Men’s shirts from Japan are about 30 times as expensive as men’s
shirts from the Philippines. That Japanese shirts remain in the market despite this price
gap suggests that high-income countries produce higher quality goods than low-income
countries, and that some consumers are willing to pay more higher quality products.
126
at the HS10-digit product level, they decompose growth in U.S. imports and
exports with its NAFTA partners from 1993 to 2001. They find that 23.8
percentage points of the 190-percent increase in U.S. imports from Mexico
occurred in products that the United States did not import from Mexico in
1993. Of the 69-percent increase in imports from Canada, 4.4 percentage
points occurred in products not imported from Canada in 1993. U.S. exports
also benefitted from an increase in the number of traded varieties. An
estimated 3.4 percentage points of the 35 percent increase in exports to
Canada, and 8.3 percentage points of the 93 percent increase in exports to
Mexico, were attributable to the growth in the number of products the U.S.
exports to those markets.
Most economic analyses measure the benefits from growth in trade among
products that are continuously traded. Consumer benefits are measured as a
function of the lower prices that occur when additional imports compete with
domestically produced goods. Schott, Hummels and Klenow, and Hillberry and
McDaniel all show that growing trade also increases the number of varieties
that U.S. importers have available to them. Theoretic models by Romer and
Feenstra suggest that getting access to more varieties may well be more
valuable to importers than lower priced goods. Welfare gains from additional
sources occur if consumers have a taste for variety, or if producers benefit from
having access to a greater number of specialized intermediate inputs.
Klenow and Rodriguez-Clare (1997) assess the benefits to Costa Rica from
its trade liberalization in the late 1980’s. They note sizable increases in the
number of imported sources for each product as a result of trade liberalization.
They also find that changes in the number of import sources per commodity
can be linked to changes in tariffs. They estimate that a 1-percent decrease in
tariffs causes a 0.34-percent increase in the number of import sources available
to intermediate producers and 0.73-percent increase in the number of import
sources available to consumers. Accounting for growth in the number of import
sources, Klenow and Rodriguez-Clare estimate the benefits to Costa Ricans
from trade liberalization are equivalent to a 1.5-percent increase in national
income. Ignoring the benefits of added variety in import sources reduces the
estimated welfare gain to that of a 1-percent increase in national income.
Thus, one-third of Costa Rica’s economic benefit from trade liberalization is
attributable to increased variety of sources for import products.
One of the empirical analyses in chapter 8 links growth in the number of
imported varieties to reductions in U.S. tariff levels. Econometric methods
establish that commodities within larger tariff reductions generally had the
largest increases in the number of import sources. Simulation modeling based
on a variant of the Klenow-Rodriguez-Clare model shows that variety growth
may account for as much as three-quarters of the economic benefits associated
with tariff reduction.
127
Conclusion
A significant portion of recent increases in international trade consists of
“new” goods, that is, goods coming from destinations that they did not come
from before. This is particularly true of the increase in U.S. imports from
Mexico post-NAFTA. It appears that such increases can be linked to specific
cuts in tariffs. Estimates for one developing country suggest that as much as a
third of the gains of trade liberalization may be due to increased import product
variety.
128
CHAPTER 5:
Industry Sector Analysis
Introduction
This chapter provides a brief overview of output, employment, and
productivity trends in all U.S. industry sectors (including services) during
1978-2001 and describes the effects of the five trade agreements on each
sector. It examines other factors that have affected developments in these
sectors including domestic and foreign competitive conditions, macroeconomic
influences, technological innovation, changes in industry structure, and
government regulations. For the purposes of this investigation, all U.S.
industries have been grouped into 10 sectors. Unless otherwise noted, these
sectors are based on the major industrial groups defined by the 1987 Standard
Industrial Classification (SIC) system. These sector groupings do not
necessarily conform to the industry aggregations used in previous Commission
investigations and, consequently, the estimated effects of trade agreements on
particular sectors may not be comparable to other investigations. For example,
the Commission’s three-year review of NAFTA1 provided detailed analyses of
67 industry sectors.
The data presented in the tables in this chapter are based on official
statistics of the Department of Commerce, Bureau of Economic Analysis and
Bureau of the Census, and U.S. Department of Labor, Bureau of Labor
Statistics. All shipment, trade, and consumption values presented in this chapter
have been converted to real (1996) dollars using the Bureau of Economic
Analysis’ implicit price deflator. Each sector discussion, with the exception of
services, contains a table presenting major trade issues addressed by one or
more of the five agreements that are relevant to the sector. The “X’s” that
appear in the table indicate that a particular trade issue was covered by the
corresponding agreement regardless of whether the agreement effectively
addressed the issue or significantly affected trade in the sector. The five trade
agreements also addressed certain cross sectoral trade issues such as
countervailing and antidumping measures that were not included in these
tables.
1 U.S. International Trade Commission, The Impact of the North American Free
Trade Agreement on the U.S. Economy and Industries: A Three Year Review, June 1997,
USITC Pub. 3045.
129
Trade liberalization since the Tokyo Round has affected U.S. producers
directly, by reducing or eliminating tariffs and other trade barriers, and
indirectly, by encouraging market integration and the adoption of new business
strategies such as outsourcing and production sharing. As a result, outsourcing
and production sharing have increased significantly in the chemicals,
machinery and equipment, transportation, miscellaneous product, and textile
sectors. These developments have allowed U.S. producers to concentrate on
core competencies, reduce inventories and input costs, and increase their
competitiveness in global markets. Transparent institutional frameworks for
dispute settlement such as those established in the Uruguay Round and
government policies that provide guarantees for foreign investment have
further encouraged market integration by eliminating much of the risk of
moving capital and products across national borders.
Many factors in addition to the five subject trade agreements have
significantly affected U.S. trade in specific sectors during the past two decades.
Revolutionary advances in information and communications technology
sparked global demand for electronics products which, in turn, spurred U.S.
exports of advanced computer and communications equipment and U.S.
imports of commodity-type electronics products. The oil crises of the 1970s
were a major impetus behind a sharp increase in U.S. demand for imports of
small, fuel-efficient Japanese vehicles. Quotas, trigger price mechanisms, and
voluntary restraint agreements restricted many types of U.S. steel imports
during the period under review, while the Multifiber Arrangement and the
Caribbean Basin Economic Recovery Act largely determined the quantity,
source, and composition of U.S. textile and apparel imports. U.S. crude oil
trade has been principally affected by price levels which fluctuate erratically as
supply and demand are driven by myriad global events.
Many diverse factors have also affected U.S. regional trade during the
period under review including financial crises in Latin America during the
1980s, in Mexico during 1994, and in East Asia during 1997-98. These events
and the exchange rate fluctuations associated with them significantly
contributed to ebbs and flows in U.S. trade with each of those regions. U.S.
trade has also been strongly affected by the economy-wide growth rates of
major markets, changes in government policy, and investments in infrastructure
such as ports, roads, and telecommunication networks. China has emerged as
both a major global supplier and market in recent years largely because it has a
very large and growing domestic market, it has revised its policies and
reformed institutions to attract foreign investment, and it has made vast
improvements in the infrastructure necessary to accommodate increased
manufacturing and trade.
Services, chemicals and allied products, and machinery and electronics
increased their share of non-government GDP in the United States, while the
transportation sector maintained its share, and all other sector shares decreased
during 1978-2001. The services sector, as discussed in this report, is a large
and diverse aggregation of industries that is much larger than the other sectors.
130
Its share of non-government GDP expanded from 68.3 percent to 78.6 percent
during 1980-2001 (table 5-1). Growth in the services sector was largely driven
by increases in telecommunication, business, and financial services.
Innovations in telecommunication and information technologies have led to the
creation of new services, such as mobile telephony, the Internet, and Internet
advertising, and have increased productivity in existing services, such as
finance and design. Other sectors also underwent significant change.
Advancements in medical knowledge and improved standards of living
contributed to the expansion of the pharmaceutical industry, which accounted
for much of the growth in the chemicals sector. The machinery and electronics
sector also benefitted from technological developments which have
revolutionized the production of electronic equipment by steadily decreasing
the size and cost of electronic components while steadily enhancing their
performance. These developments combined with fierce competition have
spurred market expansion for electronic equipment, such as cellular telephones
and personal computers. The strong growth of the U.S. economy as a whole
and its salutary effect on the construction industry have been the primary
factors affecting the expansion of the machinery subsector.
The value of shipments in the minerals and metals and the textiles and
apparel sectors decreased significantly during the period, largely owing to
foreign competition and technological advances that have lowered production
costs. Much of the decrease in the minerals and metals sector can be attributed
to lower prices for primary metal products, especially steel. The total quantity
of steel product shipments increased by 11 percent during the period, whereas
the total value of these shipments decreased by 60 percent. The value of
shipments in the U.S. textile and apparel sector decreased by 25 percent during
the period as imports from lower-wage countries replaced U.S.-made products
in many market segments.
Employment shifted significantly during 1978-2001 from the
manufacturing sectors to the services sector. The share of total private
employment2 accounted for by the services sector increased from 70 percent to
82 percent while employment in each of the manufacturing sectors, with the
exception of the chemicals sector and the forest and fishery sector, decreased
during the period. Employment cutbacks in the manufacturing sector were due
to decreased production, increased labor productivity, or both. Cutbacks were
sharpest in the minerals and metals sector, the textiles and apparel sector, and
the energy and fuels sector where output decreased significantly during the
period. Increased labor productivity in the machinery and electronics sector,
and the transportation equipment sector allowed firms to reduce employment
while increasing output.
2
Does not include farm workers or government employees.
131
132
Table 5--1
Real private gross domestic product1 and employment by industry sector, 1980 and 2001
Real private GDP1
1980
2001
Sector
Value
Share of
total3
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and electronic . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chemicals and allied products . . . . . . . . . . . . . . . . . . . . . . .
Minerals & metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forest and fishery products . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous products . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Textiles and apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Billion
dollars
3,140.7
298.6
203.3
113.6
206.7
93.3
131.2
215.4
139.1
60.2
4,598.5
Percent
68.3
6.5
4.4
2.5
4.5
2.0
2.9
4.7
3.0
1.3
100.0
1
2
3
Employment2
1980
Value
Share of
total3
Billion
dollars
6,588.2
557.7
226.3
214.8
201.7
170.5
169.5
111.4
100.1
43.0
8,383.2
Percent
78.6
6.7
2.7
2.6
2.4
2.0
2.0
1.3
1.2
0.5
100.0
2001
Employment
Share of
total3
Employment
Share of
total3
1,000
employees
48,507
4,288
1,777
1,871
3,601
1,881
32,641
1,004
2,139
2,111
69,820
Percent
69.5
6.1
2.5
2.7
5.2
2.6
3.8
1.4
3.1
3.0
100.0
1,000
employees
86,045
3,642
1,725
1,980
2,856
1,760
32,911
544
1,853
1,044
104,360
Percent
82.5
3.5
1.7
1.9
2.7
1.7
2.8
0.5
1.8
1.0
100.0
Real private GDP equals output less purchases of intermediate inputs. It does not include federal, state, or local government contributions to GDP.
Does not include farm or construction workers. Agriculture employment is primarily in good processing.
Includes employment for SIC 24 (number and wood products, except furniture), 26 (paper and allied products), and 27 (printing, publishing, and allied industries).
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis, and U.S. Department of Labor, Bureau of Labor Statistics.
Services was also the largest sector in terms of U.S. trade, increasing its
share of total exports from 19 percent to 32 percent and its share of total
imports from 15 percent to 17 percent during 1980-2001 (table 5-2). U.S.
exports increased in all sectors during this period with the exception of
agriculture and energy and fuels, while U.S. imports increased for all sectors
except energy and fuels. Most of the decrease in the value of energy and fuels
can be attributed to lower oil prices during the latter part of the period.
Views of Interested Parties
A public hearing was held in connection with this investigation on January
14, 2003. Interested parties presented their views on the subject trade
agreements at this hearing, and in written statements submitted in response to
announcements that appeared in the Federal Register. A summary of these
views is given in appendix F to this report. In addition, those views are
provided in this chapter where they apply to specific industries. Several parties
presented statements that pertain to the effects of the trade agreements on the
country as a whole, or on broad segments of the country. These general views,
which are provided by the AFL-CIO, by economist Ben Goodrich, by the
International Intellectual Property Alliance, and by the National Association of
Manufacturers, are presented here.
AFL-CIO3
The AFL-CIO is a voluntary federation of 65 national and international
labor unions that represent 13 million workers.
U.S. trade policies have resulted in “exploding trade deficits and staggering
job losses, especially in [the] manufacturing sector; significant impingement on
the power of the national government and state and local authorities to regulate
in the public interest; and dilution of protections under domestic trade laws.”
The United States should “go back to square one” and recraft its trade policies
“to ensure that they promote and protect workers’ rights and the environment
in the United States and other nations.”
Uruguay Round
The U.S. trade deficit in goods and services nearly quadrupled during
1994-2002 and these deficits have substantially retarded GDP growth. Growing
trade deficits have also eliminated a net total of 3 million actual and potential
jobs from the U.S. economy. Most (65 percent) job losses were in the
manufacturing sector. Displaced workers in import-competing sectors have had
difficulty finding jobs in growing sectors. Further, real manufacturing wages
have not kept pace with the cost of living.
3
AFL-CIO, written submission to the Commission, Feb. 14, 2003.
133
134
Table 5--2
U.S. trade by sector, 1980 and 2001
Exports
1980
Value
Share of
total1
Billion
dollars
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chemicals and allied products . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minerals and metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forestry and fish products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Textiles and apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Energy and fuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sector
1
Data may not sum to 100 due to rounding.
Source: USITC calculations.
Imports
2001
1980
Value
Share of
total1
Percent
Billion
dollars
83.4
92.6
51.4
42.8
23.1
74.7
39.5
17.9
7.2
14.2
18.7
20.7
11.5
9.6
5.2
16.7
8.8
4.0
1.6
3.2
446.8
100.0
2001
Value
Share of
total1
Value
Share of
total1
Percent
Billion
dollars
Percent
Billion
dollars
Percent
273.5
186.7
106.5
83.0
54.2
51.2
46.0
24.9
14.6
10.6
32.1
21.9
12.5
9.8
6.4
6.0
5.4
2.9
1.7
1.2
72.7
51.9
52.3
21.4
26.8
31.0
51.9
22.1
15.1
135.4
15.1
10.8
10.9
4.4
5.6
6.4
10.8
4.6
3.1
28.2
196.4
264.8
183.7
90.0
110.0
39.1
74.1
43.2
69.5
101.6
16.8
22.6
15.7
7.7
9.4
3.3
6.3
3.7
5.9
8.7
851.2
100.0
480.6
100.0
1,172.4
100.0
These factors have affected local businesses and have eroded state and
local tax bases. The Uruguay Round Agreements (URA) have negatively
affected the power to regulate in the public interest as the WTO dispute
resolution procedures have challenged domestic laws and regulations design to
protect the environment, health and safety, consumers, or workers. The URA
has also weakened the substance of U.S. trade laws and reduced the ability to
effectively implement these laws. If global competition remains unchecked, it
will make the world increasingly “unstable” by creating greater inequality and
“weaker democracies.”
NAFTA
NAFTA has been a “dismal failure” and workers’ wages in all three
NAFTA countries have fallen or stagnated. The trade surplus that the United
States had with Mexico before NAFTA is now a deficit and the deficit that it
had with Canada is now much larger. These deficits eliminate job
opportunities. NAFTA also has caused jobs to shift from “relatively
high-paying manufacturing jobs with good benefits and higher union density to
service sector jobs that pay less and provide fewer benefits.” The effect has
been particularly negative on the textile and apparel sector and the automotive
goods sector. Wage disparities between manufacturing production workers in
Mexico and the United States have increased, encouraging U.S. production to
shift to Mexico and undocumented Mexican workers to move to the United
States. “NAFTA has also made it less risky and more lucrative to move
production to Canada and Mexico” thereby “undermining the bargaining
position of U.S. workers.”
Benjamin Goodrich4
Benjamin Goodrich is employed by the Institute for International
Economics. However, the views expressed in his submission are his own and
do not necessarily reflect the views of individual colleagues or the members of
the Institute’s Board or Advisory Committee.
Mr. Goodrich generally holds a favorable view of all the subject trade
agreements. His submission emphasizes a number of points for the
Commission to keep in mind when evaluating the effects of the subject trade
agreements on the U.S. economy. It also discusses the merits and shortcomings
of various economic models that can be used to estimate the counterfactual
condition expressed as “What would the U.S. economy look like if the United
States had not implemented a certain trade agreement?”
4
Benjamin Goodrich, Institute for International Economics, written submission to
the Commission, Jan. 3, 2003.
135
International Intellectual Property Alliance5
The International Intellectual Property Alliance (IIPA) represents the U.S.
copyright-based industries in bilateral and multilateral efforts to improve
international protection of copyrighted materials. IIPA’s six member trade
associations represent over 1,100 U.S. companies producing and distributing
materials protected by copyright laws throughout the world.
Both NAFTA and the Uruguay Round have played an important role in
elevating the standards of copyright protection and enforcement around the
world although the NAFTA intellectual property provisions, which in several
ways, provide better copyright protection than that of the Uruguay Round
TRIPS6 agreement. NAFTA’s Intellectual Property Rights chapter still contains
problematic issues regarding secondary uses of sound recordings and Canada’s
extension of its “cultural industries” exclusion to intellectual property. The
multilateral reach of TRIPS and the regional reach of NAFTA have provided
firm foundations for countries to improve their copyright laws and enforcement
mechanisms to protect both domestic and foreign rightsholders. The TRIPS
agreement achieved major obligations desired by the copyright industry. The
enforcement obligations of the TRIPS agreement provide a comprehensive
foundation for the development of the procedures and remedies necessary for
effective enforcement against copyright piracy.
National Association of Manufacturers7
The National Association of Manufacturers (NAM) represents about 14,000
U.S. manufacturing companies, including approximately 10,000 small and
medium-sized firms, and more than 200 sector specific industrial trade
associations.
All of the trade agreements under investigation have been “unambiguously”
positive for the U.S. economy.
NAFTA
NAFTA has been an important source of U.S. manufacturing export
growth. “The U.S. merchandise trade deficit with Mexico is mainly caused by
U.S. oil imports and U.S.-Mexico trade in the highly integrated automotive
sector.” GDP in motor vehicles increased at an average annual rate of
4.8 percent during 1995-99 (while the rest of GDP grew at 3.8 percent.) In
addition, “NAFTA has contributed to making U.S. manufacturing firms more
5 Maria Strong, Vice President and General Counsel, International Intellectual
Property Alliance, written submission to the Commission, Feb. 14, 2003.
6 Trade-related aspects of intellectual property rights.
7 Frank Vargo, Vice President, International Economic Affairs, National Association
of Manufacturers, written submission to the Commission, Mar. 31, 2003.
136
globally competitive by permitting easier access to cheaper industrial inputs
and allowing bigger companies to reallocate resources in such a way as to
facilitate just-in-time manufacturing and outsource low-skill, low-pay
activities to Mexico while retaining high-skill, high wage activities in the
United States.” NAFTA has improved regional competitiveness by
“facilitating the improvement of North America’s transport infrastructure.”
“NAFTA has not shifted U.S. foreign direct investment in manufacturing to
Mexico and Canada.” “Foreign direct investment from other countries into
Mexico and Canada, ... has increased under NAFTA” sustaining stable
economies in these countries that “benefit U.S. economic and national
security interests.”
Uruguay Round
The URA has “benefitted U.S. manufacturing in multiple ways.” It has cut
industrial tariffs, most importantly in the zero-for-zero or tariff-harmonization
agreements that eliminated tariffs for major industrial sectors among a critical
mass of participating countries. It has also incorporated intellectual property
right protection into the system of global trading rules; improved the GATT
subsidies code; made progress in defining and proscribing the use of certain
trade-related investment measures by governments; and established a binding
dispute mechanism for resolving government-government commercial disputes.
Although the effects of the URA were generally positive, they failed to
increase “effective market access for U.S. manufactured exports to the newly
industrializing economies of developing nations.”
Services8
Overview
In 2001, the service sector accounted for $6.2 trillion, or 66.9 percent, of
real gross domestic product (GDP) and employed 79 million workers,
representing 63.2 percent of the U.S. workforce.9 Financial services accounted
for 29.9 percent of the total value of the sector; retail trade for 15.4 percent;
transportation and public utilities for 12.7 percent; and wholesale trade for 12.1
8 For the purposes of this investigation, principal service sectors include
transportation and public utility services, wholesale trade, retail trade, financial services,
and other services, the latter of which includes business services and most professional
services.
9 U.S. Department of Commerce, Bureau of Economic Analysis (BEA), Industry
Accounts Data, found at http://www.bea.doc.gov/bea/dn2/gpo.htm, retrieved Dec. 18,
2002.
137
percent during the same year.10 During 1987-2001,11 real GDP in the service
sector increased at an average annual rate of 3.8 percent.12
The United States is the world’s largest exporter and importer of services.
U.S. services exports grew 8.3 percent annually during 1987-2001, and totaled
$243.3 billion in 2001,13 which represented approximately 20 percent of global
services.14 In 2000, other major service exporters such as the United Kingdom,
Germany, France, and Japan each accounted for less than 10 percent of global
service exports. In 2001, the United States imported services valued at $175.8
billion.15 This level reflected average annual growth of 4.5 percent, and likely
represented approximately 15 percent of global imports.16 No other country
accounted for more than 10 percent of global services imports. In 2001, the
United States enjoyed a services trade surplus of $67.5 billion, the largest in
the world.
U.S. service firms have significantly expanded their presence in foreign
markets in recent years. U.S. direct investment stock in foreign service
affiliates measured $1.4 trillion in 2001, reflecting 19.3 percent average annual
growth during 1987-2001.17 By 2001, U.S. outbound investment stock in
service affiliates accounted for 65 percent of total U.S. direct investment
abroad.18 In 2001, the U.S. investment position in service industries was largest
in finance; wholesale and retail trade; computer-related services;
communication services; and electric, gas, and sanitary services.19 As a
10
Ibid.
The services sector discussion focuses on the period 1987-2001 because reliable
data for the sector are not available prior to 1987, and the two subject trade agreements
that entered into force prior to 1987 did not address the services sector.
12 U.S. Department of Commerce, BEA, Industry Accounts Data, found at
http://www.bea.doc.gov/bea/dn2/gpo.htm, retrieved Dec. 18, 2002.
13 Ibid.
14 Organization for Economic Cooperation and Development (OECD), Services:
Statistics on International Transactions: Partner Country Data and Summary Analysis,
1999-2000, July 2002, p. 8. Approximations of global export shares are based on 2000
data.
15 U.S. Department of Commerce, BEA, Survey of Current Business, Oct. 2002, p.
67. Import data have been deflated using the implicit price deflator for gross domestic
product (base year 1996).
16 Ibid., and OECD, Services: Statistics on International Transactions July 2002, p.
8. Approximations of global import shares are based on 2000 data.
17 U.S. Department of Commerce, BEA, Survey of Current Business, Aug. 1990, p.
98; and July 2001, p. 29.
18 U.S. Department of Commerce, BEA, Survey of Current Business, Sept. 2002, pp.
95-96.
19 Ibid., pp. 95-96.
11
138
consequence of direct investment overseas, U.S. service firms’ sales through
affiliates exceeded cross-border exports by 42 percent in 2000.20
Labor productivity in the services sector grew slowly, averaging 1.2 percent
per annum during 1987-2001, despite rapid acceleration in productivity growth
in the years following 1995. Yet, there was significant variation in productivity
growth among the service industries. Labor productivity in the wholesale trade
industry increased by an average annual rate of 4.5 percent; retail trade by
2.5 percent; finance by 2.3 percent, and transportation and public utilities by
2.0 percent. Other services, however, exhibited little change in productivity
during the period.21 Further disaggregation shows greater divergence within
these broad industry groupings. Several service industries, including the
securities, banking, telecommunication, energy and water utilities, wholesale
trade, and retail trade service industries, rank very high in labor and total factor
productivity growth.22 Productivity growth in these industries is greater than
that in nondurable goods manufacturing, and comparable to that in durable
goods manufacturing. At the other end of the spectrum are health services,
education, air transportation, business services, and many professional services,
which exhibited little productivity growth.23
Employment in the service sector increased at an average annual rate of 2.6
percent during 1987-2001.24 Job creation was slow in the wholesale trade and
financial service industries as relatively strong productivity growth moderated
demand for workers. By contrast, employment grew rapidly in other services,
where overall low productivity levels continued to create demand for additional
workers. Wages in the service sector grew by 1.7 percent per annum, on
average, during 1987-2001.25 Wage growth was led by financial services, while
wages in the transportation and public utilities industry and the retail trade
industry trailed. In 2001, average annual salaries ranged from a high of
20 U.S. Department of Commerce, BEA, Survey of Current Business, Oct. 2002, p.
67. Cross-border supply and sales through affiliates are two means of delivering services
to foreign consumers. Cross-border supply refers to when a service is delivered to a
consumer in a territory that is different from the territory of the service supplier. Affiliate
trade occurs when a service supplier establishes a commercial presence in a foreign
market.
21 U.S. Department of Commerce, BEA, Industry Accounts Data, found at
http://www.bea.doc.gov/bea/dn2/gpo.htm, retrieved Dec. 18, 2002.
22 See USITC, Recent Trends in U.S. Services Trade, inv. No. 332-345, May 2001,
Pub. 3409, pp. 21-2 to 21-6.
23 Ibid. Professional services generally require accreditation by a professional body
responsible for standards. Business services include services that do not require
accreditation, such as data processing services.
24 U.S. Department of Commerce, BEA, Industry Accounts Data, found at
http://www.bea.doc.gov/bea/dn2/gpo.htm, retrieved Dec. 18, 2002.
25 Ibid.
139
$161,879 for securities and commodities brokers to a low of $22,759 for
workers in personal services, such as laundry, cleaning, and garment
services.26
Technological change, particularly in the area of information technology,
has resulted in the creation of new service industries and the transformation or
reform of long established industries. Internet services provision, energy and
financial derivatives trading, and pay-per-view entertainment services are
examples of new services enabled by the application of advanced computer and
communication technologies. The parameters of competition in professional
services, such as advertising and architectural services, have been transformed
by the advent and application of new information technologies. The Internet
has compelled advertising firms to develop the ability to create and effectively
target Internet advertisements.27 Communications technology has enabled many
professional and business services, such as architectural and engineering firms,
to operate a virtual 24-hour office, relaying design work from offices on one
continent to another, allowing work on time-sensitive projects to continue
around the clock. Architectural and engineering firms enhanced the benefits of
the 24-hour virtual offices by employing new computer assisted design (CAD)
technology. Communications and computer technology have also benefitted the
transportation and distribution industries by enabling firms to improve their
logistics and tracking services. Information technologies, such as cellular
communications and multi-firm interaction over electricity networks, have
often been the focus of reform within the telecommunication and energy
services industries.
Outsourcing has also had a significant impact on the service sector as
service firms have focused on developing highly differentiated and high quality
services while reducing operating costs. Air transporters buying the services of
freight forwarders, wholesale traders and retailers buying advertising services,
or a commodities or securities broker paying another broker to execute a
specific trade are examples of outsourcing. In the transportation and public
utilities sector, real intermediate inputs (a proxy for outsourcing) increased by
4.5 percent per annum, on average, during 1987-2000; in wholesale services,
by 4.6 percent; in retail services, by 2.9 percent; in financial services, by 4.6
percent; and in other services, by 6.7 percent. Intermediate inputs as a share of
gross output increased in real terms in the transportation and public utilities,
financial, and other service industries during 1987-2000.28 Surveys conducted
26 U.S. Department of Commerce, BEA, Survey of Current Business, Aug. 2002,
Table 6.6C, p. 81.
27 USITC, “Internet Advertising,” Industry, Trade, and Technology Review, Sept.
1998, pp. 1-16.
28 U.S. Department of Commerce, BEA, Survey of Current Business, June 2000, p.
52; and Nov. 2001, p. 32.
140
by the Outsourcing Institute in 1997 showed that companies with more than
$80 million in annual revenues increased outsourcing by 26 percent in that
year alone. Reportedly, information technology was the fastest growing
outsourced activity, followed by human resources, marketing and sales, and
financial services.29
Effect of Trade Agreements on the Sector
While the subject trade agreements have contributed to increased trade in
services, their effects are likely overshadowed by external market conditions.
Trade in services was not covered by the Tokyo Round of Multilateral Trade
Negotiations or the U.S.-Israel FTA, and therefore the agreements are not
addressed in the following discussion. The U.S.-Canada FTA provided for a
partial liberalization of trade in services that was subsequently expanded by the
NAFTA to include virtually all aspects of cross-border trade in services.
NAFTA also provides for enhanced access and for fair, transparent, and
non-discriminatory treatment in the provision of cross-border services between
NAFTA members. NAFTA also establishes governing principles and rules
covering temporary access, which is vitally important to many service
providers. Generally, U.S. service firms face more favorable market access and
national treatment conditions in Canada and Mexico than they did before
NAFTA. One of the major achievements of the Uruguay Round was the
General Agreement on Trade in Services (GATS). The GATS improved legal
certainty and regulatory transparency, and discouraged the implementation of
new trade impediments where commitments had been scheduled. However,
GATS commitments generally bound current market conditions and, while
preventing a worsening of the trade regime, did not achieve significant trade
liberalization.30
U.S.-Canada FTA 31
U.S.-Canadian trade in services increased at an average annual rate of 5.6
percent during 1989-2001, reaching $42.4 billion at the end of the period.32
U.S. exports of services to Canada totaled $13.3 billion in 1989, and reached
$24.3 billion in 2001, a 5.1 percent average annual increase (table 5-3). U.S.
29 Claude E. Barfield and Cordula Thum, The New World of Services: Implications
for the United States (Miami: Institute for International Professional Services, 2001),
p. 13.
30 USTR, WTO Services Trade Negotiations, found at
http://www.ustr.gov/sectors/services/gat.pdf, retrieved June 3, 2003.
31 The U.S.-Canada FTA includes several sections relating to services including
investment, temporary entry, and financial services.
32 U.S. Department of Commerce, BEA Survey of Current Business, Oct. 2002,
pp. 86-107; Oct. 1999, pp. 68-81; Nov. 1996, pp. 86-99; Sept. 1994, pp. 107-116.
141
142
Table 5-3
Services: U.S. trade with Canada and Mexico, 1988-2001
Year
1988
1989
1990
1991
1992
1993
1994
9,716
7,056
83,162
8,688
7,269
84,422
9,223
7,410
91,307
10,132
7,849
101,120
99,934
100,379
107,940
119,101
Million dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . .
8,350
5,068
67,584
8,640
5,976
70,679
9,130
6,731
82,349
Total . . . . . . . . . . . . . . . . . . . . . . . .
81,002
85,295
98,210
Percent
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . .
-
3.5
17.9
4.6
5.7
12.6
16.5
6.4
4.8
1.0
-10.6
3.0
1.5
6.2
1.9
8.2
9.9
5.9
10.7
Total . . . . . . . . . . . . . . . . . . . . . . . .
Canada/Total . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . .
10.3
6.3
5.3
10.1
7.0
15.1
9.3
6.9
1.8
9.7
7.1
0.4
8.7
7.2
7.5
8.5
6.9
10.3
8.5
6.6
17,750
9,666
125,021
17,380
10,492
135,816
16,971
10,440
144,177
17,216
11,344
158,797
152,437
163,688
171,588
187,357
Million dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . .
10,703
4,911
85,357
13,323
4,822
99,790
15,684
8,590
112,958
Total . . . . . . . . . . . . . . . . . . . . . . . .
100,971
117,935
137,232
Percent
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . .
-
24.5
-1.8
16.9
17.7
78.1
13.2
13.2
12.5
10.7
-2.1
8.5
8.6
-2.4
-0.5
6.2
1.4
8.7
10.1
Total . . . . . . . . . . . . . . . . . . . . . . . .
Canada/Total . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . .
10.6
4.9
16.8
11.3
4.1
16.4
11.4
6.3
11.1
11.6
6.3
7.4
10.6
6.4
4.8
9.9
6.1
9.2
9.2
6.1
See footnotes at end of table.
Table 5-3—Continued
Services: U.S. trade with Canada and Mexico, 1988-2001
Year
1995
1996
1997
1998
1999
2000
2001
15,487
9,816
142,163
15,559
9,434
148,248
17,130
10,999
173,931
18,133
10,954
163,218
167,466
173,241
202,060
192,305
Million dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . .
11,160
7,930
109,691
12,451
8,918
115,733
13,923
9,830
128,038
Total . . . . . . . . . . . . . . . . . . . . . . . .
128,781
137,102
151,791
Percent
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . .
10.1
1.0
8.5
11.6
12.5
5.5
11.8
10.2
10.6
11.2
-0.1
11.0
0.5
-3.9
4.3
10.1
16.6
17.3
5.9
-0.4
-6.2
Total . . . . . . . . . . . . . . . . . . . . . . . .
Canada/Total . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . .
8.1
8.7
6.2
6.5
9.1
6.5
10.7
9.2
6.5
10.3
9.2
5.9
3.4
9.0
5.4
16.6
8.5
5.4
-4.8
9.4
5.7
19,126
11,629
213,177
21,105
12,643
222,744
23,465
14,104
239,909
24,276
14,580
227,353
243,932
256,492
277,478
266,209
Million dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . .
17,927
8,705
177,136
19,492
9,442
193,699
20,484
10,799
207,701
Total . . . . . . . . . . . . . . . . . . . . . . . .
203,768
222,633
238,984
Percent
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . .
4.1
-23.3
11.5
8.7
8.5
9.4
5.1
14.4
7.2
-6.6
7.7
2.6
10.3
8.7
4.5
11.2
11.6
7.7
3.5
3.4
-5.2
Total . . . . . . . . . . . . . . . . . . . . . . . .
Canada/Total . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . .
8.8
8.8
4.3
9.3
8.8
4.2
7.3
8.6
4.5
2.1
7.8
4.8
5.1
8.2
4.9
8.2
8.5
5.1
-4.1
9.1
5.5
Source: Compiled by the U.S. International Trade Commission based on data provided by the U.S. Department of Commerce, Bureau of Economic Analysis, Survey of
Current Business.
143
imports of services from Canada totaled $8.6 billion in 1989, and reached
$18.1 billion in 2001, a 6.4 percent average annual increase. Over the period,
the U.S. services trade surplus with Canada increased by an average annual
rate of 2.3 percent.
Although the data indicate growing trade between the United States and
Canada, there is limited evidence that the U.S.-Canada FTA has had a
significant effect on trade between the two countries. In 1989, U.S.-Canadian
trade accounted for 10.8 percent of total U.S. trade in services. This figure
declined fairly consistently until 2001, when Canada accounted for 9.2 percent
of the total. Although trade with Canada was growing, U.S. trade with other
countries was growing at a faster rate. During 1989-2001, U.S.-Canadian trade
in services grew at an annual rate of 5.6 percent, slightly less than the average
growth rate of 7.0 percent for total U.S. trade in services with all countries.
This slower-than-average pace allowed the United Kingdom to supplant
Canada as the second largest export market for U.S. services in 2001.
Data for individual industries within the services sectors reaffirm the
limited effects of the U.S.-Canada FTA. Within the services sector, the travel
industry accounts for the largest portion of U.S. cross-border trade, both for
Canada and all countries in total. U.S. trade with Canada in the travel industry
totaled $13.0 billion in 2001 and accounted for 30.6 percent of all
U.S.-Canadian services trade. U.S. travel exports to Canada increased at an
average annual rate of 1.6 percent during 1989-2001, far below the growth rate
for all countries.
NAFTA
U.S. trade in services with Canada increased at an average annual rate of
6.5 percent during 1994-2001, reaching $42.4 billion at the end of the period.33
U.S. exports of services to Canada totaled $17.2 billion in 1994, and reached
$24.3 billion in 2001, a 5.0 percent average annual increase. U.S. imports of
services from Canada totaled $10.1 billion in 1994, and reached $18.1 billion
in 2001, an 8.7 percent average annual increase. As imports rose faster than
exports, the U.S. trade surplus in services declined 2.0 percent during the
period. U.S.-Mexican trade in services increased at an average annual rate of
4.2 percent during 1994-2001, totaling $25.5 billion.34 U.S. exports of services
to Mexico totaled $11.3 billion in 1994 and $14.6 billion in 2001, which
represented a 3.7 percent average annual increase. U.S. imports of services
33
U.S. Department of Commerce, BEA, Survey of Current Business, Oct. 2002,
pp. 86-107; Oct. 1999, pp. 68-81; Nov. 1996, pp. 86-99; Sept. 1994, and pp. 107-116.
34 Ibid.
144
from Mexico totaled $7.9 billion in 1994 and $11.0 billion in 2001, a 4.9
percent average annual increase.35 Trade with Mexico accounted for 6.3
percent of all U.S. services trade in 1994 and 5.6 percent in 2001.
Trade in services between the United States and Canada and Mexico has
increased steadily since the NAFTA entered into force, yet the correlation
between the growth in trade and any trade creating effects of the Agreement
appear to be low. For example, although U.S.-Canadian trade in business,
professional, and technical services,36 rose by an annual rate of 15.2 percent
during 1994-2001, the growth was likely due to factors other than the NAFTA,
as there were few barriers to such trade in place before 1994. Generally, these
services became more prominent because demand for them increased
significantly during the economic expansion of the late 1990s. In contrast,
financial services is one service industry where the effects of NAFTA are
regarded as significant. NAFTA has raised foreign investment ceilings, thereby
facilitating greater investment by U.S. banking and security firms in Mexico.
Uruguay Round
One of the major achievements of the Uruguay Round was the General
Agreement on Trade in Services (GATS), the first multilateral, legally
enforceable agreement on trade and investment in services. The GATS
comprises a framework of general regulatory obligations, schedules wherein
WTO Members identify market access and national treatment commitments,
and annexes that specify the parameters of negotiations and establish work
programs as necessary. The GATS improved legal certainty and regulatory
transparency, and discouraged the implementation of new trade impediments
where commitments had been scheduled. However, because WTO members’
market access and national treatment commitments generally bound the status
quo, the GATS did not achieve significant trade liberalization.37
Data for the period suggest that the GATS had little or no effect on U.S.
cross-border services trade. On average, U.S. cross-border services exports
increased at a slower annual rate during the five years following the GATS’
entry into force–5.9 percent–than in the five years prior, when exports
increased by 8.1 percent annually. This, combined with relatively rapid import
growth in the latter period, resulted in a 2.7-percent average annual growth in
the U.S. service trade surplus during 1995-99, compared to 15-percent average
annual growth during 1990-94.38
35 U.S. exports of services to Mexico were disrupted in 1995, 1996, and, to a lesser
extent, in 1997 by effects of the peso devaluation on Mexico’s economy.
36 U.S.-Canadian trade in business, professional, and technical services accounted
for 11.9 percent of total U.S. trade in services in 2001.
37 USTR, WTO Services Trade Negotiations, found at
http://www.ustr.gov/sectors/services/gat.pdf, retrieved June 3, 2003.
38 U.S. Department of Commerce, BEA, Survey of Current Business, Oct. 2002,
p. 67. During 1995-99, services trade reflected broad economic currents as well as trade
145
Although the GATS did not fully liberalize cross-border trade, its
provisions regarding the establishment of a commercial presence appear to
have contributed to the rise in U.S. direct investment abroad during the 1990s,
and consequent increased sales of services through foreign affiliates. Such sales
grew at an average annual rate of 16.8 percent during 1995-99.39 Bolstered by
the strong growth in foreign direct investment, U.S. parent firms’ stock in
foreign service affiliates increased by 14 percent per annum, on average, during
1990-98.40
Views of Interested Parties
Air Transportation Association 41
The Air Transportation Association (ATA) is the principal trade and service
organization of the U.S. scheduled airline industry.
Of the 5 subject trade agreements, only the URA covers commercial air
transport although the ATA generally supports all of these and other
agreements that liberalize trade with foreign partners. However, some free trade
agreements, such as the U.S.-Singapore FTA, cover express delivery services
similar to those provided by certain ATA members. Even so, there is not yet
industry consensus on this approach to liberalization.
The URA, particularly the General Agreement on Trade in Services
(GATS), covers limited aspects of commercial air transportation. The GATS
Annex on Air Transport Services covers three sub-sectors, two of which the
United States has taken exemptions on. ATA supports the U.S. government
position that liberalization of air transportation services can best be achieved
under the current, broad exclusion from the GATS of most activities in this
sector. ATA believes that the existing venues and mechanisms for air transport
liberalization are sufficient.
38—Continued
agreements. Export prospects were likely dampened in the latter 1990s by relatively
weak economic growth in continental Europe and Japan, the principal U.S. services
export markets. For example, average annual growth of gross domestic product during
1995-99 measured 2.3 percent in France, 1.5 percent in Germany, and 1.0 percent in
Japan. By contrast, U.S. gross domestic product averaged 4.1-percent annual growth
during this period, which stimulated services imports. OECD, Quarterly National
Accounts, No. 1, 2000.
39 U.S. Department of Commerce, BEA, Survey of Current Business, Oct. 2002,
p. 67.
40 USITC, Examination of U.S. Inbound and Outbound Direct Investment, Jan.
2001, Pub. 3383, p. 3-22.
41 Edward A. Merlis, Senior Vice President, Legislative and International Affairs,
Air Transportation Association written submission to the Commission, Jan. 21, 2003.
146
Machinery and Electronics42
Overview
The United States is the world’s largest producer and consumer of
machinery and electronic products. The sector includes a large and extremely
diverse group of industries that manufacture products ranging from cellular
telephones to farm tractors. The electronics subsector, which is dominated by
the computer hardware, communications equipment, and electronic component
industries, has significantly expanded and evolved since the implementation of
the Tokyo Round Agreements in 1980. The machinery subsector, on the other
hand, is primarily composed of mature industries such as those producing
refrigeration and heating equipment, construction machinery, and farm
equipment that, for the most part, have changed comparatively little during this
period. Despite apparent differences, the two subsectors share certain
characteristics. They are both dominated by a relatively small number of
producers that are headquartered primarily in the United States, Japan, the EU,
and Korea. Further, industries in both subsectors tend to be globalized in terms
of production, sourcing of inputs, and sales.
U.S. shipments of machinery and electronics, as a group, increased at a
relatively modest average annual rate of 2.5 percent, from $488.1 billion to
$833.5 billion43 during 1978-2000 (table 5-4). Most of this growth occurred
during the last 10 years of the period aided by the vibrant U.S. economic
expansion of 1991-2000 and sharply increasing demand for sector products.
U.S. apparent consumption of sector products increased by 79 percent during
1991-2000. However, the value of shipments and apparent consumption each
fell by 18 percent when this expansion ended in 2001. Growth rates for
individual subsectors did not necessarily follow the same trends; factors
affecting production and demand differed widely, causing shipment,
employment, and wage trends to move independently of one another. The share
of total sector shipments from each subsector changed appreciably during the
period. Electronic components and communications equipment, which each
accounted for more than 7 percent of the value of sector shipments in 1978,
had increased to 18 percent and 12 percent, respectively, in 2001 while the
share accounted for by computer and office equipment increased from 9
percent to 12 percent. During the same period, the share of the sector total that
comprises construction, mining, and materials handling equipment decreased
from 12 percent to 7 percent, and the general industrial equipment share
decreased from 8 percent to 6 percent.
42 For the purposes of this investigation, the machinery and electronics sector
includes all industries classified in groups 35 and 36 of the Standard Industrial
Classification of 1987. This sector also includes electrical equipment. Although
computer equipment and office machinery is classified in SIC group 35 with industrial
and commercial machinery, in this chapter it will be treated as part of the electronics
subsector.
43 In real (1996) dollars.
147
148
Table 5-4
Machinery and electronics sector:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
526.6
92.2
72.9
545.9
-19.4
509.1
105.2
71.8
542.6
-33.4
513.1
114.9
80.2
547.9
-34.7
538.2
131.4
99.3
570.3
-32.1
541.4
133.3
107.1
567.7
-26.3
16.9
13.8
19.4
14.1
21.0
15.6
23.0
18.5
23.5
19.8
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . . .
488.1
45.7
72.6
461.2
26.7
521.8
49.4
80.7
490.5
31.4
520.3
51.9
92.6
479.5
40.8
524.4
55.5
94.7
485.2
39.2
479.5
53.7
82.6
450.6
28.9
484.6
64.0
74.2
474.4
10.2
531.0
86.6
76.9
540.7
-9.7
Percentage
Imports/apparent
consumption . . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . . .
9.9
14.9
10.1
15.5
10.8
17.8
11.4
18.1
11.9
17.2
13.5
15.3
Total employment . . . . . . . . . . . . . .
4,046
4,301
4,288
4,294
3,965
3,756
4,086
4,054
3,864
3,777
3,853
3,869
Production workers . . . . . . . . . . .
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
2,368
2,383
Hourly earnings . . . . . . . . . . . . . .
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
13.06
12.94
(2)
(2)
(2)
227
227
16.0
14.5
1,000 workers
Constant (1996) dollars
(2)
(2)
$1,000 per worker
Labor productivity . . . . . . . . . . . . . .
See footnotes at end of table.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
Table 5-4—Continued
Machinery and electronics sector:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
738.2
241.9
207.3
772.9
-34.7
741.2
250.4
196.2
795.4
-54.2
750.8
276.0
199.9
827.0
-76.1
833.5
320.6
226.6
927.5
-94.1
680.5
264.8
186.7
758.5
-78.1
31.3
28.1
31.5
26.5
33.4
26.6
34.6
27.2
34.9
27.4
3,857
2,433
3,913
2,463
3,808
2,390
3,847
2,396
3,642
2,210
13.21
13.44
13.69
13.81
13.90
303
301
314
348
308
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . . .
526.3
130.2
117.7
538.7
-12.5
498.3
129.5
120.8
507.0
-8.7
516.7
141.9
125.4
533.2
-16.4
544.1
159.8
133.2
570.7
-26.6
603.5
191.7
152.0
643.2
-39.7
667.5
225.6
175.3
717.8
-50.3
702.4
227.0
183.6
745.8
-43.4
Percentage
Imports/apparent
consumption . . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . . .
24.2
22.4
25.5
24.2
26.6
24.3
28.0
24.5
29.8
25.2
31.4
26.3
Total employment . . . . . . . . . . . . . .
Production workers . . . . . . . . . . .
3,768
2,315
3,591
2,192
3,457
2,123
3,456
2,144
3,560
2,243
3,692
2,340
30.4
26.1
1,000 workers
3,775
2,377
Constant (1996) dollars
Hourly earnings . . . . . . . . . . . . . .
12.83
12.81
12.81
12.82
12.84
12.79
12.96
$1,000 per worker
Labor productivity . . . . . . . . . . . . . .
227
227
243
254
269
285
296
1
Includes SIC 35 (industrial and commercial machinery and computer equipment) and 36 (electronic and other electrical equipment and components, except computer
equipment).
2 Not available.
149
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics.
Production increases were more than matched by gains in labor
productivity so that the increase in sector output coincided with a decrease in
sector employment. Total employment for machinery and electronics decreased
slightly, from 3.7 million in 1978 to 3.6 million in 2001, and fluctuated
between 3.4 million and 3.9 million during the interim. Real average wages for
production workers in the group increased by 7 percent from $13.08/hour to
$13.98/hour during 1988-2001,44 while labor productivity increased by 36
percent from $227,000 per worker to $308,000 per worker.
The electronics subsector, especially communications equipment, computer
equipment, and electronic components, led sector growth during the period.
The real value of electronic component shipments more than quadrupled
between 1978 and 2000, while the real value of communications equipment
and computer and office equipment nearly tripled. However, shipments of each
of these products decreased significantly during 2001. Productivity gains were
especially high for electronics subsector industries such as communications
equipment and electronic components. Output per production worker increased
by 110 percent in the communications equipment industry and by 58 percent in
the electronic components industry during 1988-2001.
The electronics subsector’s significant growth in output and productivity
reflects a pervasive transformation shaped by technological advances, huge
growth in U.S. and global demand for subsector products, increasing
globalization, and intense competition. Throughout this transformation, the
U.S. electronics subsector has been a leading innovator in industries such as
telecommunications and computer equipment, and semiconductors. U.S.
innovative strength has led to continuous improvements in manufacturing
technology which allowed the production of ever-smaller integrated circuits
(chips) containing an ever-larger number of components. Since chips are the
heart of most electronic devices, these improvements led to lower prices
relative to performance and contributed to the growth and development of the
computer and telecommunications equipment industries. Lower prices, in turn,
created new markets for chips in high volume end uses such as children’s toys,
home appliances, and automobiles.45 In fact, the share of the total cost of an
average automobile accounted for by electronic components increased from
approximately 1 percent in 1980 to between 8 and 15 percent in 2000.46
44 Employment and wage data were not available for all production workers in these
groups prior to 1988 due to changes in classification.
45 Thomas Walter Smith, “Semiconductors”, July 18, 2002, Standard & Poors
Industry Survey, p.1, found at
http://www.netadvantage.standardandpoors/netahtml/IndSur/sec/sec30702.htm,
retrieved Nov. 2, 2002.
46 U.S. Department of Commerce, “Microelectronics,” U.S. Industry and Trade
Outlook 2000 (New York, NY: McGraw-Hill, 2000), p. 16-1.
150
The introduction of the IBM personal computer (PC) in 1981 and
commercial cellular telephone service in 1983 contributed significantly to the
growth of the electronics subsector. IBM’s decision to use open architecture in
its PC design spawned competition that could use off-the-shelf components to
create IBM clones. This decision and the adoption of Microsoft DOS in the
1980s, which standardized computer operating systems, made personal
computers a product that could be easily mass produced to meet escalating
demand. The creation of a cellular telephone infrastructure, its subsequent
upgrades, and the demand for cellular handsets with the latest features have
driven much of the growth of the telecommunications equipment industry and
have increased the number of new players in the U.S. market.
The 1984 breakup of the AT&T monopoly in local telecommunication
service and the spinoff of Lucent Technologies from AT&T in 1996 promoted
greater competition among telecommunications equipment manufacturers for
sales to U.S. local and long distance service providers that had previously
relied on in-house production. The creation of the Worldwide Web in 1989
vastly increased the resources available through the personal computer and
greatly enhanced its value as a communications tool. In addition, the
privatization of European telecommunication service providers and the
liberalization of the markets for these services during the 1980s and 1990s
forced these entities to increase their investment in communications equipment
to remain competitive with new entrants to the market, thereby creating new
export opportunities for U.S. firms.47
The leading position of the U.S. electronics industry in advanced
technologies throughout the period was supported by significant investment in
research and development, an educated and technically skilled workforce, and
numerous institutions of higher learning with curricula tailored to electronic
and computer engineering.48 Strong competition within the U.S. market has
promoted the flexibility required to adapt to changing market conditions, and
U.S. firms were often among the first to adopt new, more efficient, business
models.49 For example, in recent years, many U.S. firms have turned to
outsourcing, contract manufacturing, and production sharing in lower wage
countries to reduce costs and focus production on higher value operations. This
approach allows many firms to remain competitive despite the most significant
competitive weakness of the U.S. electronics industry—its relatively higher
labor costs vis-à-vis emerging suppliers Asia, Mexico, and Eastern Europe.50
47 Multimedia Telecommunications Association, 1998 Multimedia Telecommunications Market Review and Forecast (Arlington, VA: MMTA Market Research Board,
1998), pp. 12-13.
48 National Science Foundation, “Higher Education in Science and Engineering,” in
Science and Engineering Indicators 2002 (Arlington, VA: National Science Board,
2002), vol. 1, pp. 2-1 to 2-50.
49 Stephen Shankland, “High-tech Manufacturers Add Brains to Brawn,” Cnet
News.Com, Aug. 18, 2000, found at http://news.cnet.com, retrieved Apr. 4, 2001.
50 Deutsche Bank Securities, Inc., Global Equity Research, Supply and Demand:
Uneven Odds, Jan. 17, 2003, p.12.
151
The machinery subsector has not undergone the dramatic transformations
that have characterized the electronics industry since 1980. Whereas changes in
the electronics sector created new markets and stimulated demand for a wide
variety of new products and services, the machinery sector, for the most part,
manufactured products for traditional markets and end uses. Products such as
construction and farm machinery typically are durable and not much innovation
occurs from year to year so that sales are driven by factors such as crop prices
and interest rates rather than technological advances. Many types of heating, air
conditioning, farm, construction, and mining equipment have become
marginally more efficient during this period or more environmentally friendly,
although they have remained largely unchanged. Demand for machinery
products is affected by a number of cyclical factors and, for the most part,
moves with general economic upswings and downturns. Interest rates have a
large impact on demand because most major machinery purchases are financed.
Construction machinery is affected by the level of construction activity and
government spending on public buildings, roads and other infrastructure.
Mining equipment is affected by many of the same factors– a large share of
this equipment is used to quarry stone and gravel used by the construction
industry– and by the price of various minerals and metals. Farm equipment
sales typically rise and fall with interest rates and crop prices.
The number of production workers employed in the machinery subsector as
a whole remained steady at 1.2 million during 1988-2001,51 while production
increased by 27 percent. Productivity gains were among the highest in the
construction machinery, refrigeration and heating equipment, and farm
machinery subsectors, each increasing by 30 percent or more during the period.
Wages for production workers in these three subsectors increased by an
average of 35 percent.
Globalization and consolidation increased in industries such as farm
machinery, construction equipment, and heating, ventilation, and air
conditioning (HVAC) equipment. Major manufacturers of farm machinery such
as John Deere, Case, Caterpillar, AGCO, and New Holland and HVAC
equipment such as York, Trane, and Rheem, are multinational businesses that
manufacture throughout the world, producing equipment to meet local market
needs.52 The United States and Canada have been the largest producers of
high-horsepower farm equipment during the period, while Europe has
dominated the production of mid-range equipment, and Japan has been the
world’s leading producer of small-scale equipment. Despite the growing
number of production facilities located in foreign markets by
U.S.-headquartered firms, export sales continue to account for a significant
share of U.S. machinery production.
51
Employment data were not available for this subsector prior to 1988.
U.S. Department of Commerce, “Production Machinery,” U.S. Industry and Trade
Outlook 2000 (New York, NY: McGraw-Hill, 2000), p. 18-8; York International
Corporation, 2002 Form 10-K; American Standard Companies Inc. 2002 Form 10-K, and
About Rheem found at www.rheemac.com/press/081402.html, retrieved May 28, 2003.
52
152
Effect of Trade Agreements on the Sector
Although the subject trade agreements are not the primary factors driving
the expansion of the sector, they addressed a broad range of trade issues that
contributed to the expansion (table 5-5). Four of the five trade agreements–
Tokyo Round Agreements, the U.S.-Canada FTA, NAFTA, and the Uruguay
Round agreements– likely had measurable positive effects on U.S. sector trade.
The U.S.-Israel FTA did not have a measurable effect on U.S. trade primarily
because Israel accounts for such a small share of total sector trade. The
Uruguay Round Agreements likely had a significant effect on trade of
electronic equipment through the Information Technology Agreement and the
Basic Telecommunications Agreement. The former eliminated tariffs on many
information technology products in most major markets and the latter opened
telecommunications services to competition in all major markets which, in turn,
spurred demand for telecommunications equipment.
However, most of the growth in production and trade that has taken place
in the U.S. machinery and electronics industry since 1980 can be attributed to
factors other than the 5 trade agreements that are the subject of this
investigation (table 5-20). These factors include very strong growth in demand,
the development of new technologies and applications; increased deregulation
and privatization of the telecommunication services industries (the major
customers for telecommunications equipment); the rapid evolution of wireless
communications, data communications, and Internet services;53 increased
production sharing and global outsourcing of equipment and components by
U.S., EU, Japanese, and Canadian producers. Macroeconomic factors such as
exchange rate fluctuation and economic crises in Mexico (1995) and several
Asian countries (1998) have also had a major impact on sector trade. As
discussed below the magnitude of these effects on the U.S. economy varies
among the 5 agreements.
Tokyo Round
The effect of Tokyo Round agreements on the U.S. machinery and
electronics sector was modest at best. The trade-weighted average tariff
concessions by the EC, Canada, and Japan for sector imports from the United
States were 2.1 percentage points, 5.3 percentage points, and 7.8 percentage
points, respectively. The trade-weighted average U.S. tariff on sector imports
was relatively low (5.4 percent) during 1979, the year prior to the entry into
force of the agreement, and had fallen only 2.5 percentage points by 1987, the
year of the final tariff reduction under the agreement. Increased trade during
this period can be primarily attributed to factors discussed above such as
privatization and technological advances in the electronics industry, rather than
trade liberalization.
53
Telecommunications Industry Association (TIA), 2001 MultiMedia
Telecommunications Market Review and Forecast (Washington, DC: TIA, 2001),
pp. 3-15.
153
154
Table 5-5
Machinery and electronics: Trade issues addressed in trade agreements and U.S. tariffs
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1979) 5.4%
(1987) 2.9%
(1984) 0.6%
(1995) 0.2%
(1987) 2.3%
(1998) <0.1%
(1994) 2.1%
(1999) 0.7%
(1993) 1.2%
(2001) 0.1%
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
Import licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Trade issues and U.S. tariffs
Customs valuation . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Government procurement . . . . . . . . . . . . . . . . . . . .
X
X
X
X
Offsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
Rules of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Restrictions on telecom equipment purchases . . .
X
X
X
X
X
X
TRIMs3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
TRIPS4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
1
2
The NAFTA provides that tariffs be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2008 for all other goods.
Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the
world during the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates
n parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
3 Trade-related investment measures.
4 Trade-related aspects of intellectual property rights.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative,
Trade Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
The Tokyo Round agreements addressed several market access barriers that
were important to the sector such as government procurement and technical
barriers although significant obstacles remained. Government procurement was
especially important to the telecommunications industry because most
telecommunication
service
providers–the
largest
customers
for
telecommunications equipment–were government-owned during the 1980s.
Between 1980, the year of the first stage of the Tokyo Round tariff
reductions, and 2000, total U.S. trade in machinery and electronics products
increased at an average annual rate of 6.9 percent, reaching $547 billion before
dropping by 17.5 percent in 2001. U.S. sector imports increased more than
six-fold, reaching $321 billion, while sector exports nearly tripled to
$264 billion during 1980-2000. A sector trade surplus of $41 billion in 1980
became a $94-billion deficit by 2000. International trade became increasingly
important to the sector during this period as globalization increased and
production sharing became a more widely accepted business model. Imports as
a share of U.S. apparent consumption increased from approximately 11 percent
to 35 percent and exports as a share of shipments increased from 18 percent to
27 percent during 1980-2001.
U.S.-Israel FTA54
It is likely that most of the growth in U.S.-Israel sector trade since 1985
has resulted from factors other than the U.S.-Israel FTA because most sector
imports already entered the United States duty-free prior to 1985. The average
trade-weighted tariff for U.S. imports of sector products from Israel was only
0.6 percent in 1984, and Israel continues to account for a very small share of
U.S. sector trade. Although trade has grown steadily since the FTA was signed,
Israel still accounts for less than one percent of total sector trade. Further, the
FTA did not specifically address product standards, a significant barrier to U.S.
trade in electronics products. Israel tends to apply European standards, and this
has become a recurring issue in talks between the United States and Israel.
U.S. trade in sector products with Israel increased at an average annual rate
of 10.2 percent during 1985-2000 reaching $5.2 billion, before decreasing by
27 percent in 2001. The value of U.S. sector imports from Israel increased by
652 percent during 1985-2000 while sector exports to Israel approximately
tripled (table 5-6).
U.S.-Canada FTA
The U.S.-Canada FTA had a moderate effect on U.S. sector trade and
production,although factors other than the trade agreement were responsible for
most sector growth. The average U.S. trade-weighted tariff on sector imports
from Canada was 2.3 percent in 1987 and was almost zero in 1998. Rapidly
54
1995.
The U.S.-Israel FTA was signed in 1985 and was fully implemented by Jan. 1,
155
156
Table 5-6
Machinery and electronics: U.S. trade with Israel, 1984-2001
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
679.6
132,636.3
133,315.8
688.2
129,483.4
130,171.6
744.3
128,748.8
129,493.0
872.1
140,984.8
141,856.9
Million dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
346.5
86,247.8
86,594.3
460.2
91,765.8
92,226.0
465.2
104,720.8
105,186.0
581.9
114,307.8
114,889.7
697.7
130,706.4
131,404.0
Israel/Total . . . . . . . . . . .
U.S. import growth
0.4
0.5
0.4
0.5
0.5
0.5
0.5
0.6
0.6
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
—
—
—
32.8
6.4
6.5
1.1
14.1
14.1
25.1
9.2
9.2
19.9
14.4
14.4
-2.6
1.5
1.5
1.3
-2.4
-2.4
8.1
-0.6
-0.5
17.2
9.5
9.6
943.6
106,110.5
107,054.1
961.5
116,738.0
117,699.5
1,006.4
119,787.8
120,794.2
907.5
124,508.4
125,415.9
Percent
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
796.2
76,125.3
76,921.4
747.8
72,111.6
72,859.4
701.6
71,061.7
71,763.3
709.4
79,435.8
80,145.2
845.8
98,421.8
99,267.6
Israel/Total . . . . . . . . . . .
U.S. export growth
1.0
1.0
1.0
0.9
0.9
0.9
0.8
0.8
0.7
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
—
—
—
-6.1
-5.3
-5.3
-6.2
-1.5
-1.5
1.1
11.8
11.7
19.2
23.9
23.9
11.6
7.8
7.8
1.9
10.0
9.9
4.7
2.6
2.6
-9.8
3.9
3.8
Percent
See footnotes at end of table.
Table 5-6—Continued
Machinery and electronics: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
1,402.1
240,536.4
1,542.9
248,883.9
1,665.5
274,365.2
3,000.9
317,601.8
2,079.8
262,683.2
241,938.5
250,426.8
276,030.8
320,602.7
264,763.1
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
975.9
158,774.9
1,205.7
190,485.1
1,218.8
224,371.4
1,272.7
224,701.0
Total . . . . . . . . . . . . .
159,750.8
191,690.8
225,558.2
226,973.7
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
0.6
0.6
0.5
0.6
0.6
0.6
0.6
0.9
0.8
11.9
12.6
12.6
23.6
20.0
20.0
0.9
17.8
17.7
4.6
0.6
0.6
10.2
6.6
6.6
10.0
3.5
3.5
8.0
10.2
10.2
80.2
15.8
16.2
-30.7
-17.3
-17.4
1,640.4
205,616.1
1,637.7
194,561.2
1,972.2
197,928.0
2,211.7
224,340.0
1,708.2
185,006.1
207,256.6
196,198.8
199,900.1
226,551.7
186,714.3
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
1,169.4
131,978.9
1,268.9
150,755.8
1,698.0
173,561.9
1,803.9
181,783.9
Total . . . . . . . . . . . . .
133,148.2
152,024.6
175,259.9
183,587.7
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.9
0.8
1.0
1.0
0.8
0.8
1.0
1.0
0.9
28.9
6.0
8.5
14.2
33.8
15.1
6.2
4.7
-9.1
13.1
-0.2
-5.4
20.4
1.7
12.1
13.3
-22.8
-17.5
Total . . . . . . . . . . . . .
6.2
14.2
15.3
4.8
12.9
-5.3
1.9
13.3
-17.6
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
157
growing demand for sector products in both markets and the presence of
major electronics producers on both sides of the border to meet this demand
were the principal factors spurring trade growth between Canada and the
United States during this period. Most of the beneficial effects of the trade
agreement were due to the elimination of technical barriers and
discriminatory government procurement procedures rather than tariff
elimination because tariffs were already relatively low. Trade-weighted
average U.S. tariffs on imports of sector products from Canada were 2.3
percent in 1987, the year before the FTA took effect, and had fallen to
almost zero by 1998. The positive trade effects were sufficient to have a
measurable effect on U.S. sector production and employment because of the
large share of total sector trade accounted for by Canada.
Canada was the second-largest U.S. trading partner for sector products in
1988 and has remained among the top three during every succeeding year. U.S.
trade with Canada in sector products increased at an average annual rate of 8.4
percent during 1988-2000, reaching $67.0 billion before decreasing
21.5 percent during 2001 (table 5-7). This growth rate exceeded the average
growth of 7.3 percent for U.S. sector trade with all countries during 1988-2000.
U.S. exports of machinery and electronic products to Canada increased 95.2
percent to $31.9 billion during 1988-2001, and U.S. imports of sector products
from Canada increased 124.3 percent to $20.7 billion during the same period.
Canada’s share of total U.S. sector imports fluctuated between 7.0 percent and
8.9 percent during 1988-2001 while its share of sector exports fluctuated
between 15.7 percent and 20.1 percent of the total with neither showing an
apparent trend.
NAFTA
NAFTA has had at least a moderate effect on U.S. trade in sector products,
although the impact of the factors discussed above, most notably increased
U.S. demand, has been greater. The GSP program already provided duty-free
treatment for most U.S. sector imports from Mexico. The average U.S.
trade-weighted tariff on sector imports from Mexico was only 1.2 percent in
1993 and had decreased to 0.1 percent by 2001. However, NAFTA permanently
eliminated tariffs for all sector products, unlike the GSP tariff concessions
which were dependent on periodic renewal of the program and regular reviews
to determine country and product eligibility. Thus, NAFTA removed much of
the risk associated with foreign investment in production operations in Mexico
that exported to the United States. It is likely that the Mexican tariff
concessions had a small to moderate positive effect on U.S. exports of sector
products because Mexico’s average trade-weighted tariff on sector imports
from the United States decreased significantly (from 13.6 percent to 2.3
percent) during 1991-99,55 and Mexico’s importance as a market for sector
55
158
Data were not available for 1993 and 2001.
Table 5-7
Machinery and electronics products: U.S. trade with Canada and Mexico, 1987-2001
Year
1987
1988
1989
1990
1991
1992
1993
1994
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
8,327.5
6,688.4
99,873.7
9,223.2
8,650.5
113,530.4
10,377.2
9,542.9
113,395.8
11,289.8
9,493.1
109,388.8
11,499.8
9,976.4
108,016.9
11,773.7
11,382.2
118,701.0
12,460.0
12,872.7
134,418.1
15,242.5
17,657.3
158,791.0
Total . . . . . . . . . . . . . . . . . . . . . . .
114,889.7
131,404.0
133,315.8
130,171.6
129,493.0
141,856.9
159,750.8
191,690.8
Percent
Canada/Total . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
7.3
5.8
7.0
6.6
7.8
7.2
8.7
7.3
8.9
7.7
8.3
8.0
7.8
8.1
8.0
9.2
—
—
—
10.8
29.3
13.7
12.5
10.3
-0.1
8.8
-0.1
(1)
1.9
5.1
-1.3
2.4
14.1
9.9
5.8
13.1
13.2
22.3
37.2
18.1
Total . . . . . . . . . . . . . . . . . . . . . .
—
14.4
1.5
-2.4
-0.5
9.6
12.6
20.0
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
15,088.5
6,298.0
58,758.7
16,330.8
8,500.2
74,436.6
16,848.4
9,103.1
81,102.5
24,127.7
9,849.9
83,721.9
22,459.1
11,138.8
87,196.3
23,434.8
13,193.1
88,788.0
25,355.2
13,508.5
94,304.5
29,356.1
16,275.9
106,392.6
Total . . . . . . . . . . . . . . . . . . . . . .
80,145.2
99,267.6
107,054.1
117,699.5
120,794.2
125,415.9
133,148.2
152,024.6
Percent
159
Canada/Total . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
18.8
7.9
16.5
8.6
15.7
8.5
20.1
8.4
18.6
9.2
18.7
10.5
19.0
10.2
19.3
10.7
—
—
—
8.2
35.0
26.7
3.2
7.1
9.0
43.2
8.2
3.2
-6.9
13.1
4.2
4.3
18.4
1.8
8.1
2.4
6.2
15.9
20.5
12.8
Total . . . . . . . . . . . . . . . . . . . . . . .
—
23.9
7.8
9.9
2.6
3.8
6.2
14.2
See footnotes at end of table.
160
Table 5-7—Continued
Machinery and electronics: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
20,909.3
31,470.8
198,046.8
22,484.6
37,280.9
216,265.2
28,115.6
45,233.1
247,254.1
20,686.9
43,211.5
200,864.7
250,426.8
276,030.8
320,602.7
264,763.1
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
17,727.3
20,511.2
187,349.7
18,340.9
23,607.4
185,025.4
19,372.3
27,597.8
194,968.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
225,558.2
226,973.7
241,938.5
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
7.9
9.1
8.1
10.4
8.0
11.4
8.4
12.6
8.2
13.5
8.8
14.1
7.8
16.3
16.3
16.2
18.0
3.5
15.1
-1.2
5.6
16.9
5.6
7.9
14.0
1.6
7.5
18.5
9.2
25.0
21.3
14.3
-26.4
-4.5
-18.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
17.7
0.6
6.6
3.5
10.2
16.2
-17.4
36,436.9
24,613.8
134,148.1
36,711.1
26,949.6
136,239.4
38,890.0
31,908.0
155,753.7
31,884.6
25,944.3
128,885.4
196,198.8
199,900.1
226,551.7
186,714.3
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
31,762.8
15,176.2
128,321.0
32,464.1
18,337.3
132,786.3
36,458.5
23,587.2
147,210.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
175,259.9
183,587.7
207,256.6
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
18.1
8.7
17.7
10.0
17.6
11.4
18.6
12.6
18.4
13.5
17.2
14.1
17.1
13.9
8.2
-6.8
20.6
2.2
20.8
3.5
12.3
28.6
10.9
-0.1
4.4
-8.2
0.8
9.5
0.8
5.9
18.4
14.3
-18.0
-18.7
-17.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.3
4.8
12.9
-5.3
1.9
13.3
-17.6
1 Less than 0.5 percent.
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
products grew. NAFTA further stimulated cross-border investment in this
sector by requiring greater consistency and transparency in Mexico’s banking
regulations.
Mexico was the second largest export market and import source for U.S.
sector products in 1993, the year before the NAFTA entered into force,
accounting for 8.1 percent and 10.2 percent of total sector imports and exports,
respectively. By 2001, Mexico’s import share had more than doubled and it had
increased its share of U.S. sector exports to 13.9 percent. U.S. sector trade with
Mexico increased at an average annual rate of 14.7 percent during 1994-2000
before decreasing by 10.4 percent in 2001.
Uruguay Round
The Uruguay Round Agreements had a slight to moderate effect on sector
trade especially U.S. exports, although most of the increase in U.S. trade
following the implementation of the Round can be attributed to factors
discussed above. Much of the effect of the Round was due to the Information
Technology Agreement (ITA) which eliminated tariffs on all information
technology
products,
such
as
computers,
semiconductors,
and
telecommunications equipment. Although the agreement entered into force in
July 1997, the products subject to the ITA here covered by the residual
proclamation authority of the Uruguay Round Agreements Act. Prior to the
entry into force of the ITA, U.S. tariffs on information technology products
were generally low. However, tariffs for U.S. information technology exports in
certain growing markets such as India and Indonesia were 30 percent to 40
percent.
Trade-weighted average U.S. tariffs for sector imports from all trading
partners were only 2.1 percent during 1994 and were reduced to 0.7 percent in
1999. Although the Agreement on Government Procurement positively affected
U.S. exports, the high value required for contracts to qualify under this
agreement mitigated the benefits likely to accrue to U.S. producers. In addition,
tariff reductions for most telecommunications equipment did not occur because
the United States made these reductions contingent upon receiving a sufficient
number of WTO signatories for the Government Procurement Agreement. It
did not receive the necessary signatures. U.S. tariffs on most electronics
equipment were ultimately eliminated by the Information Technology
Agreement which entered into force on July 1, 1997.
During 1995-2000, U.S. trade in machinery and electronic products
increased at an average annual rate of 6.4 percent, reaching $547 billion before
dropping 17 percent in 2001. U.S. sector imports increased by 17 percent and
sector exports increased by 7 percent during 1995-2001, causing an already
negative trade balance to increase by $28 billion.
161
Views of Interested Parties
National Electrical Manufacturers Association 56
The National Electrical Manufacturers Association (NEMA) is the largest
trade association representing the interests of U.S. electrical industry
manufacturers. NEMA has more than 400 member companies, most of which
are small and medium-sized, that manufacture products used in the generation,
transmission, distribution, control, and use of electricity.
NEMA supports world-wide elimination of tariffs on electrical, electronic,
and medical imaging equipment through WTO zero-for-zero tariff elimination;
through regional agreements; and through bilateral trade agreements.
NAFTA
Approximately one-half of U.S. exports of NEMA-type products are
destined for Canada and Mexico, and NAFTA has been the motor driving the
growth of these exports since 1994.
Uruguay Round
“The Uruguay Round (UR) did not go far enough in eliminating tariffs in
[NEMA’s] industries.” Many countries refused to sign the UR agreement to
eliminate tariffs on medical equipment, and the medical equipment
“zero-for-zero” did not cover some critical components and parts of medical
devices. “High tariffs remain a major barrier” to NEMA’s member sales
“outside the EU, NAFTA, and Japan,” “particularly in more advanced
developing countries that are rapidly industrializing.” Standards and technical
barriers remain in the European Union (EU) and Japan which hamper the sales
of NEMA members and although tariffs in these countries are still relatively
low they still cost NEMA members millions of dollars.
Agriculture57
Overview
The United States is the world’s largest producer and exporter of
agricultural products, accounting for 19.5 percent of global agricultural exports
56 Statement by Timothy Richards, General Electric, on behalf of the National
Electrical Manufacturers Association (NEMA), written submission to the Commission,
Mar. 28, 2003.
57 For the purpose of this investigation, agricultural products are composed of SIC
groups 01, 02, 20, and 21. Principal U.S. products in this sector include corn, wheat,
soybeans, cotton, tobacco, and hay; horticultural products such as fruits, vegetables, and
162
in 1999.58 The U.S. agricultural sector consists of millions of farms and
ranches producing raw agricultural goods and a much smaller number of
food companies that process, package, and market these goods. The food
companies tend to be large multinational corporations, whereas much of the
raw agricultural produce is grown on family farms.
Technological innovations in farming have led to greater productivity,
which is reflected in the ability of fewer farmers to produce more food on less
farmland, at lower cost to consumers. This is a long term trend, which has led
to the consolidation of U.S. farms as well as a net decline in U.S. farmland.
The number of U.S. farms steadily decreased from about 2.3 million to
1.9 million during 1978-97 while the average farm increased in size from 449
acres to 487 acres. The number of farms decreased, in part, because economic
competition pushed some farmers out of business while average size increased
as farmers sought to achieve larger economies of scale. This trend also led to
higher productivity through, for example, more capital spending on farm
equipment, irrigation, and genetically modified seed and plant varieties.
However, the high cost of obtaining these technological innovations and the
specialized skills needed to utilize them meant that smaller, outdated operations
could not compete with larger, updated farms. Increased productivity along
with increased international trade have resulted in, in general, lower prices for
farm commodities and greater abundance, with consumers spending less, on
average, for food as a percentage of household income.
The value of sector shipments has remained relatively constant, declining
slightly from $706.2 billion to $701.1 billion during 1978-2000 (table 5-8).
Small variations in shipments from year to year were, in large part, the result
of price fluctuations. While overall sector output changed little from 1978 to
2001, there were significant changes within the sector. For example, major
agricultural crops such as grains, oilseeds, cotton, and tobacco experienced
falling prices and a decline in the U.S. share of world production. Declining
U.S. tobacco consumption and increasing production in other countries
contributed to a large decrease in the value of U.S. tobacco production. In
contrast, the value and global share of U.S. vegetable and poultry production
increased.
The number of hired farm workers increased from approximately 880,000
in 1994 to 991,000 in 2001.59 The number of farm workers is difficult to
estimate, in part, because much of the work is temporary or part-time and
varies greatly according to the time of year, and work is often done by farm
operators and/or family members. Further, many farm workers are migrant
57—Continued
other garden products; livestock such as poultry, cattle, calves, hogs, sheep, and lambs;
and livestock products such as dairy foods, meat and related products, leather, and wool.
58 FAS Online, http://www.fas.usda.gov/cmp/highlights/1998/marketshare.htm.
59 These were the only years for which employment data are available. As reported
from official statistics of the USDA, National Agricultural Statistics Service.
163
164
Table 5-8
Agricultural products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and
exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
628.6
28.5
41.4
615.8
12.8
626.5
29.8
36.6
619.7
6.8
641.6
28.0
39.7
629.9
11.7
670.1
27.5
49.8
647.8
22.3
687.8
27.3
52.6
662.5
25.3
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . .
Trade balance . . . . . . . . . . . . . . .
706.2
31.2
62.9
674.5
31.8
729.5
32.3
68.8
693.1
36.4
718.4
31.0
74.7
674.7
43.7
684.8
28.1
71.8
641.1
43.7
654.5
24.6
57.3
621.7
32.7
Imports/apparent
consumption . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . .
4.6
4.7
4.6
4.4
4.0
8.9
9.4
10.4
10.5
8.8
678.3
26.5
56.8
648.0
30.3
653.3
28.1
54.7
626.7
26.6
Percentage
4.1
4.5
4.6
4.8
4.5
4.2
4.1
8.4
8.4
6.6
5.8
6.2
7.4
7.7
(3)
1,665
(3)
1,665
(3)
1,672
(3)
1,681
(3)
1,694
6.00
11.82
6.24
11.82
6.28
11.74
6.26
11.61
6.44
11.48
1,000 workers
Total employment:
Agricultural workers2 . . . . . . . .
Processed food workers4 . . . .
(3)
1,795
(3)
1,803
(3)
1,777
(3)
1,742
(3)
1,705
(3)
1,682
(3)
1,676
Constant (1996) dollars
Hourly earnings:
Agricultural workers5 . . . . . . . .
Processed food workers6 . . . .
See footnotes at end of table.
(3)
12.06
(3)
12.03
(3)
12.08
6.04
12.03
6.04
12.08
6.24
12.58
5.82
11.91
Table 5-8—Continued
Agricultural products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and
exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
714.4
37.1
60.9
690.6
23.8
703.5
37.7
54.8
686.4
17.1
692.6
38.7
49.8
681.6
11.1
699.0
39.3
51.9
686.4
12.7
701.1
39.1
51.2
688.9
12.2
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . .
Trade balance . . . . . . . . . . . . . . .
686.3
27.9
51.5
662.7
23.6
669.5
27.0
49.2
647.3
22.2
669.2
28.7
52.0
646.0
23.3
672.7
28.2
50.2
650.7
22.0
668.7
29.4
53.8
644.3
24.4
Imports/apparent
consumption . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . .
4.2
4.2
4.4
4.3
4.6
7.5
7.4
7.8
7.5
8.0
687.2
31.3
62.8
655.8
31.4
697.0
34.5
65.7
665.9
31.1
Percentage
4.8
5.2
5.4
5.5
5.7
5.7
5.7
9.1
9.4
8.5
7.8
7.2
7.4
7.3
1,004
1,727
983
1,724
989
1,720
952
1,721
991
1,725
7.21
11.45
7.24
11.59
7.42
11.73
7.58
11.87
7.68
11.88
1,000 workers
Total employment:
Agricultural workers2 . . . . . . . .
Processed food workers4 . . . .
(3)
1,710
(3)
1,716
(3)
1,710
(3)
1,723
880
1,721
954
1,734
935
1,733
Constant (1996) dollars
Hourly earnings:
Agricultural workers5 . . . . . . . .
Processed food workers6 . . . .
6.38
11.35
6.21
11.27
6.60
11.32
6.65
11.29
6.66
11.33
6.67
11.36
6.79
11.40
1 Includes SIC 01 (agricultural production - crops), 02 (agriculture production livestock and animal specialties), 20 (food and kindred products), and 21 (tobacco
products).
2 Includes full- and part-time hired farm workers. U.S. Department of Agriculture, National Agricultural Statistics Service, Agricultural Statistics Board.
3 Not available.
4 Data for SIC 20 and SIC 21.
5 Wage rate for all hired farm workers, except for agricultural service workers. U.S. Department of Agriculture, National Agricultural Statistics Service, Agricultural
Statistics Board.
6 Wage rate for production workers employed in SIC 20 and SIC 21.
Note.–Figures may not sum to total because of rounding.
165
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics, except as noted.
laborers who move from one crop to another. Similarly, packing and
processing plants may be extremely busy for a few weeks during the harvest
season, but need fewer workers during the remainder of the year. Average
hourly wage rates for hired farm workers has increased steadily, from $6.04
in 1981 to $7.68 in 2001 (table 5-8).60
Many growers reported lower commodity prices and increasingly difficult
financial conditions during 1978-2001.61 Growers received an increasingly
smaller percentage of the retail value of agricultural products while processors,
distributors, and marketers received an increasingly larger share. This trend
may indicate a loss of pricing power for growers that sell to corporations and
retail establishments, which have become larger and more vertically and
horizontally integrated. In order to gain more pricing power, many growers
have joined cooperatives that negotiate prices and share profits with their
grower members. Farm prices are also influenced by government programs that
vary greatly by crop, but often provide price support, purchase schemes, target
prices, and in the past, export subsidies, or general assistance to farmers. The
Export Enhancement Program (EEP) was announced by USDA on May 15,
1985, and is operated under authority of the Agricultural Trade Act of 1978 as
amended, the Uruguay Round Agreements Act, and the Federal Agriculture
Improvement and Reform Act of 1996.62 Consistent with its export subsidy
commitments under the Uruguay Round Agreement on Agriculture, the United
States has established annual ceilings by commodity with respect to export
quantities and budget outlays. A formula known as an Aggregate Measure of
Support (AMS) was established for eac commodity o measure the total amount
of government support, as well as reduction levels.63 The commitment to
60
Ibid.
Prices at the consumer level do not necessarily reflect the prices received by
farmers. Most of the shipment value for agricultural products is added after the products
leave the farm in the packing, processing, and marketing stages.
62 Other agricultural export assistance programs include the Market Access Program
(MAP) which is designed to create, expand, and maintain foreign markets for U.S.
agricultural commodities; the Foreign Market Development Program (FMD) which
assists U.S. nonprofit trade organizations in developing and maintaining foreign markets
for U.S. agricultural programs; the Dairy Export Incentive Program (DEIP) which assists
exporters of U.S. dairy products in meeting prevailing world prices for targeted dairy
products; the CCC Export Credit Guarantee Programs (GSM) 102/103 which helps
guarantee financing of agricultural sales; the Supplier Credit Guarantee Program (SCGP)
which guarantees a portion of payments due from importers; the Quality Samples
Program (QSP) which assists in providing commodity samples to potential foreign
importers; and the Facility Guarantee Program (FGP) which provides payment
guarantees to facilitate the financing of facilities for U.S. agricultural products in
emerging markets.
63 United States domestic support: Deriviation of the 1986-88 base aggregate
measurement of support (AMS) and the base for reductions, from World Trade
Organization
and
Economic
Research
Service.
http://www.ers.
usda.gov/briefing/FarmPolicy.
61
166
respect the quantity ceilings became effective July 1, 1995; the commitment
to respect budgetary outlay ceilings became effective October 1, 1995.64
Trade is essential to the U.S. agricultural sector, with revenue from U.S.
exports accounting for between 20 and 30 percent of total farm income
between 1978 and 2001.65 Lower prices for U.S. products and improved
access through trade agreements have permitted U.S. farmers to expand their
share of foreign markets. However, owing to falling world prices for bulk
agricultural commodities, the total value of U.S. exports during this period has
remained relatively stagnant. Historically, bulk commodities–wheat, rice, coarse
grains, oilseeds, cotton, and tobacco–accounted for most U.S. agricultural
exports. However, in the 1990s, as population and incomes rose worldwide,
U.S. exports of high-value products (HVP)–meats, poultry, live animals,
oilseed meals, oils and oil seeds, fruits, vegetables, and beverages–expanded
steadily in response to demand for more food diversity. Whereas bulk
commodities accounted for over two-thirds of U.S. agricultural exports in
1978, by 2000 the HVP share had increased to 65 percent.66
Live animals and meat such as beef, pork, and poultry accounted for about
$8 billion of U.S. exports in 2001. The fastest growing U.S. exports during
1978-2001 were beverages (including juices and wines), vegetables, and
vegetable products. The main destinations for U.S. agricultural exports during
the period were Canada, China, the EU, Hong Kong, Japan, Mexico, South
Korea, and Taiwan. These top export destinations have varied little during the
last decade.67
U.S. agricultural exports have exceeded U.S. agricultural imports since the
late 1950s, generating a surplus in U.S. agricultural trade. However, the U.S.
agricultural export surplus narrowed from 1978 to 2001 as imports grew and
exports declined. Imports during this period increased from $31.2 billion in
1978 to $39.1 billion in 2001, while exports declined from $62.9 billion to
$52.6 billion, causing a decrease in the trade surplus from $31.8 billion to
$13.6 billion. The trade surplus during this period peaked in 1980 and 1981 at
$43.7 billion and fell to its lowest level of $6.8 billion in 1986. Apparent
consumption remained relatively stable from 1978 to 2001, rising slightly from
$674 billion to $687 billion, in constant 1996 dollars. The import share of U.S.
consumption rose slightly from about 4.6 percent to 5.7 percent during this
period, while exports as a percentage of U.S. shipments fell slightly, from
about 8.9 percent to 7.5 percent.
64 From FASonline, http://www.fas.usda.gov/excredits/eep.html, USDA Foreign Agricultural Service, Aug. 9, 2002.
65 It varied from a low of about 20 percent in 1985, to a high of about 30 percent in
1980, and was about 25 percent in 2002. USDA/ERS, U.S. Agricultural Trade, from U.S.
Agricultural Baseline Projections to 2010, Feb. 2001.
66 USDA/ERS, U.S. Agricultural Trade, from U.S. Agricultural Baseline Projections
to 2010, Feb. 2001.
67 Ibid.
167
U.S. agricultural imports grew throughout the 1980s and 1990s, in part,
because of the appreciation of the dollar versus the currencies of many major
trading partners. Alcoholic beverages, including wine, beer, malt beverages,
and distilled sprits, were the largest category of U.S. agricultural imports in
2001, totaling nearly $8 billion. Horticultural products such as fruits,
vegetables, nuts, and nursery products such as ornamental plants, and including
items not produced in the United States such as coffee, cocoa, and rubber also
accounted for a large percentage of U.S. agricultural imports. Animals and
animal products were another important category of imports. In the last two
decades, U.S. sector import sources varied little and came primarily from
Australia, Brazil, Canada, Columbia, the EU, Indonesia, and Mexico.68
Effect of Trade Agreements on the Sector
While the Tokyo Round and the U.S.-Israel FTA had minimal effects on
agricultural products, the U.S.-Canada FTA and NAFTA phased out most
existing tariffs between Canada, Mexico, and the United States. Each of the
five agreements also addressed a range of additional trade issues in the sector
(table 5-9). In addition, the Uruguay Round was the first multilateral round that
required most countries to convert existing quantitative restrictions on trade in
agriculture into bound tariff rates and tariff-rate quotas, and bound all
participants to significant phased reductions of tariffs.
However, some of the trade effects of reduced agricultural tariffs may have
been moderated by other protective measures in the industry. Many national
governments have a long tradition of protecting their domestic growing and
processing industries from foreign competition and have placed some of the
most varied and formidable trade barriers in the agriculture sector. Grower
organizations in many countries wield important political and economic power
which help to influence national trade policy in favor of protection.
Self-sufficiency in food production has been the goal of many governments as
a national security issue. Further, in many parts of the world, the cultivation of
agricultural products such as rice in parts of Asia and wine and grape
production in Southern Europe has long been part of the national culture and
tradition, and international trade is often perceived as a threat.
Agricultural trade barriers can take many forms because food is subject not
only to tariffs and quotas but to a variety of sanitary and phytosanitary
standards that may vary from country to country. In the past, trade agreements
that succeeded in lowering tariff rates often led to the appearance of nontariff
barriers (NTBs) such as time-consuming port inspections, unusual sanitary
standards or packaging requirements, shelf-life rules, or food-additive rules that
impede trade. Later agreements would attempt to address some of these
nontariff barriers.
68
Ibid.
168
Table 5-9
Agricultural products: Trade issues addressed in trade agreements and U.S. tariffs
Trade issues and
U.S. tariffs
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
(1979) 3.2%
(1987) 3.5%
(1984) 5.3%
(1995) 0.2%
(1987) 2.4%
(1998) <0.1%
(1994) 6.3%
(1999) 1.6%
(1993) 2.4%
(2001) 0.4%
X
X
X
X
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Import licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
Minimum access . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government procurement . . . . . . . . . . . . . . . . . . . .
X
X
X
SPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Rules of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Quotas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
TRIMs3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRIPS4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
1
2
The NAFTA provides that tariffs be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2008 for all other goods.
Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the world
during the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates in
parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
3 Trade-related investment measures.
4 Trade-related aspects of intellectual property rights.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative, Trade
Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
169
Tokyo Round
Between 1980, the year of the first stage of the Tokyo Round tariff
reductions, and 2000, total U.S. trade in agricultural products decreased by
13.7 percent, as U.S. imports increased by 26.8 percent while U.S. exports
declined by 30.5 percent (table 5-8). Imports as a share of U.S. apparent
consumption grew from 4.6 percent in 1978 to 5.6 percent in 2000, while U.S.
exports as a share of shipments fell from 8.9 percent to 7.4 percent.
The most important effect of the Tokyo Round on the U.S. agricultural
sector may have been to lay the groundwork for the subsequent URAA
discussed in more detail at the end of this section. The Tokyo Round had little
effect on average U.S. tariff rates in agriculture. In fact, U.S. tariffs increased
slightly from 3.2 percent to 3.5 percent during 1979-87. The Tokyo Round
mainly affected manufactured products, and used the “Swiss” formula designed
to result in a fairly deep overall reduction in tariffs while cutting high rates
proportionately more than low ones. The same formula was used to reduce
agricultural rates during the 1994 GATT Agreement on Agriculture.
As part of the Tokyo Round, the GATT Arrangement Regarding Bovine
Meat (1980-1994) entered into effect on January 1, 1980. The primary
objectives of the Arrangement were to promote the expansion, liberalization,
and stability of the international meat and livestock market by improving the
international framework of world trade to the benefit of consumers, producers,
importers, and exporters; to encourage greater international cooperation in all
aspects affecting trade in bovine meat and live animals; and to secure
additional benefits for the international trade of developing countries in bovine
meat and live animals.
Also a part of the Tokyo Round, the International Dairy Arrangement
entered into effect on January 1, 1980. The primary objectives of the
Arrangement were to advance the expansion and liberalization of world trade
in dairy products under as stable as possible market conditions, on the basis of
mutual benefit to exporting and importing countries, and to further economic
and social development in developing countries.
The International Dairy Arrangement was concluded in the Tokyo Round
of multilateral trade negotiations in 1979. The Arrangement covered fresh and
preserved milk and cream, butter, cheese and curd and casein with the purpose
of expanding and liberalizing world trade in dairy products. The Arrangement
established minimum export prices for skimmed milk powder, wholemilk
powder, buttermilk powder, anhydrous milk fat, butter, and cheese. It was
replaced by the International Dairy Agreement when the WTO was established
on January 1, 1995. Owing to non-participation by some major dairy exporting
countries (including Australia and the United States), the operation of the
minimum price regime was untenable. As a result, the Agreement was
terminated as of January 1, 1998.69
69
170
International Dairy Agreement. Annual Reports from 1995 and 1997.
U.S.-Israel FTA
The United States-Israel Free Trade Agreement (FTA) eliminated most
trade barriers between the two countries. However, according to the United
States Trade Representative, substantial barriers remain with regard to Israel’s
agricultural sector.70 U.S. agricultural exports to Israel after the agreement rose
slightly, from $438.7 million in 1984 to $461.5 million in 2001. During this
period, Israel never accounted for more than 1 percent of U.S. agricultural
exports. The U.S. share of Israel’s agricultural imports averaged 38 percent in
the 5 years prior to the agreement and dropped to 29 percent in the following 5
years. Bulk commodities dominated U.S. agricultural exports to Israel, with 93
percent of the total value prior to the agreement and 87 percent in the
following 5-year period.
U.S. agricultural imports from Israel have historically been low, and rose
from $82.2 million in 1984 to $113.2 million in 2001 (table 5-10). During this
period, the share of U.S. agricultural imports that came from Israel remained
unchanged at about 0.3 percent. Two-thirds of total U.S. agricultural imports
from Israel are consumer-oriented goods such as dairy products, biscuits, and
wafers, which grew 44 percent following the FTA, while horticultural imports
from Israel doubled.71
Although tariffs were significantly reduced, the agreement permitted each
country to maintain NTBs for the protection of sensitive agricultural products.
Israel maintained levies and fees on a wide range of agricultural products and
placed quotas and bans on others. Such NTBs as well as certain technical
barriers to trade continue to hamper U.S. access to the Israeli market. On the
other hand, the reduction in duties and setting of tariff-rate quotas for nearly
100 products has helped increase certain U.S. exports such as frozen fruit and
breakfast cereals to Israel. Israel’s import liberalization programs with other
countries and new trade agreements have diluted U.S. advantages under the
bilateral agreement.
The substantial NTBs on agricultural imports in Israel led to the 1996
Agreement on Trade in Agricultural Products (ATAP), establishing a program
of gradual and steady market access liberalization for food and agricultural
products. The ATAP was negotiated, in part, in an effort to reconcile the
inconsistencies between the 1985 Agreement and the global trade rules that
resulted from the Uruguay Round. The Uruguay Round and Israel’s
membership in the newly formed WTO required the Government to transform
into tariffs all administrative or nontariff barriers to trade, which had been
allowed under the FTA. The ATAP is comprehensive and provides for
immediate and meaningful access for U.S. farm products in the Israeli market
The agreement reduced duties and established TRQs for nearly 100 U.S.
70
USTR, 2001 National Trade Estimate Report on Foreign Trade Barriers, (USTR,
Washington, DC), p. 201.
71 Michael Kurtzig and Daniel Pick, “U.S.-Israel FTA,” in Burfister and Jones (eds.),
Regional Trade Agreement and U.S. Agriculture, USDA Agricultural Economics Report
No. 771 (November 1988).
171
172
Table 5-10
Agricultural products: U.S. trade with Israel, 1984-2001
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
70.4
27,390.5
83.9
27,177.1
83.7
27,841.9
75.5
26,888.1
73.4
28,635.5
27,460.9
27,261.0
27,925.6
26,963.6
28,708.9
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
82.2
27,971.0
90.2
28,452.3
97.2
29,654.2
86.1
27,926.2
Total . . . . . . . . . . . . . . . . .
2,805.0
28,542.4
29,751.5
28,012.3
Percent
Israel/Total . . . . . . . . . . . . . . .
U.S. import growth
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
0.3
Israel . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
—
—
9.7
1.7
7.8
4.2
-11.5
-5.8
-18.2
-1.9
19.2
-0.8
-0.2
2.5
-9.9
-3.4
-2.8
6.5
Total . . . . . . . . . . . . . . . . .
—
1.7
4.2
-5.9
-2.0
-0.7
2.4
-3.5
6.5
454.6
49,319.8
397.4
52,191.1
402.1
51,109.2
383.2
48,803.6
456.1
51,533.8
49,774.4
52,588.5
51,511.4
49,186.8
51,989.9
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
438.7
54,219.2
375.8
40,977.1
350.7
36,239.4
358.9
39,377.8
Total . . . . . . . . . . . . . . . . .
54,657.9
41,352.9
36,590.2
39,736.7
Percent
Israel/Total . . . . . . . . . . . . . . .
U.S. export growth
0.8
0.9
1.0
0.9
0.9
0.8
0.8
0.8
0.9
Israel . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
—
—
—
-14.3
-24.4
-24.3
-0.7
-11.6
-11.5
0.2
8.7
8.6
26.7
25.3
25.3
-12.6
5.8
5.7
1.2
-2.1
-2.1
-4.7
-4.5
-4.5
19.0
5.6
5.7
See note at end of table.
Table 5-10—Continued
Agricultural products: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
94.2
36,961.1
108.6
37,583.2
109.0
38,634.3
103.9
39,180.5
113.2
38,949.0
37,055.2
37,691.8
38,743.2
39,284.4
3,906.0
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
77.5
28,159.9
66.1
29,315.3
81.1
31,261.5
86.8
34,432.6
Total . . . . . . . . . . . . . . . . .
28,237.4
29,381.4
31,342.6
34,519.4
Percent
Israel/Total . . . . . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
0.3
0.2
0.3
0.3
0.3
0.3
0.3
0.3
0.3
5.6
-1.7
-14.7
4.1
22.6
6.6
7.1
10.1
8.5
7.3
15.4
1.7
0.3
2.8
-4.6
1.4
8.9
-0.6
Total . . . . . . . . . . . . . . . . .
-1.6
4.1
6.7
10.1
7.4
1.7
2.8
1.4
-0.6
592.2
60,258.0
442.7
54,370.2
501.4
49,316.9
549.2
51,383.1
461.5
50,783.1
60,850.3
54,812.9
49,818.3
51,932.3
51,244.6
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
416.4
49,783.5
494.9
53,273.7
574.7
62,170.7
684.5
64,964.5
Total . . . . . . . . . . . . . . . . .
50,199.9
53,768.6
62,745.4
65,649.0
Percent
Israel/Total . . . . . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . .
0.8
0.9
0.9
1.0
1.0
0.8
1.0
1.0
0.9
-8.7
-3.4
18.9
7.0
16.1
16.7
19.1
4.5
-13.5
-7.2
-25.3
-9.8
13.3
-9.3
9.5
4.2
-16.0
-1.2
Total . . . . . . . . . . . . . . . . .
-3.4
7.1
16.7
4.6
-7.3
-9.9
-9.1
4.2
-1.3
Note.–Figures may not sum to total because of rounding.
173
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
products and allowed for the free entry of many other U.S. products. The
ATAP was negotiated with a 5 year time frame which lapsed in 2001, after
which the two sides committed to seek further improvements. Under ATAP,
all U.S. food and agricultural products have access to the Israeli market
under one of three different categories: unlimited duty-free access; duty-free
TRQs; or preferential tariffs, which are generally set at least 10 percent
below Israel’s Most-Favored Nation (MFN) rates.
Some of the remaining obstacles to free trade between the United States
and Israel include product standards such as weights and measures, and kashrut
(Kosher) certification. Israel requires that many household products be sold in
fixed package sizes (e.g., 200, 400, or 500 grams), using metric measures. This
trade barrier particularly hurts U.S. exports of vegetables, fruits, and pasta. In
1994, Israel established the Israeli Kosher Meat Import Law prohibiting all
imports of non-kosher meat.
U.S.-Canada FTA
U.S. bilateral trade with Canada in agricultural products grew substantially
during the years following the agreement. U.S. agricultural imports from
Canada grew from $3.4 billion in 1987 to $10.0 billion in 2001, while U.S.
agricultural exports to Canada during this period grew from $2.4 billion to $7.4
billion (table 5-11).
The United States is Canada’s largest supplier of agricultural imports.
Fruits, vegetables, and other horticultural products account for about one-half
of U.S. sector exports to Canada (table 5-11). Other important U.S. exports to
Canada include livestock products, grains, oilseeds, and sugar products.
Leading U.S. sector imports include livestock products, grains, and oilseeds.
The United States has become increasingly important for Canadian agricultural
exports, taking over one-third of Canada’s total agricultural exports in 2001.
Under the U.S.-Canada FTA (CFTA), the United States and Canada agreed to
eliminate most existing tariffs and most nontariff barriers. Quantitative
restrictions such as quotas and licenses were left in place, to be addressed in
the Uruguay Round. The agreement excluded domestic price support programs
and border measures for both countries and access at preferential rates to
over-TRQ rate lines. However, both pledged to develop mutually advantageous
rules and disciplines on subsidies and dumping, both contentious agricultural
issues. The CFTA dispute settlement panel resolved two significant agricultural
trade disagreements–U.S. countervailing duties on Canadian pork and Canadian
durum wheat pricing. The panel ruled in Canada’s favor in both cases and the
United States accepted the decisions. The panel, operating bilaterally, was
envisioned as being more expedient than a GATT panel. The United States
sought to include new provisions in the North American Free Trade Agreement
(NAFTA) to address trade-distorting border measures, a major area of
dispute.72
72
USDA/ERS “U.S.--Canada Free Trade Agreement: Trade Disputes and
Settlement,” Apr. 1993, , Agriculture Information Bulletin Number 664--1.
174
Table 5-11
Agricultural products: U.S. trade with Canada and Mexico, 1987-2001
Year
1987
1988
1989
1990
1991
1992
1993
1994
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . .
3,453.3
2,492.8
22,066.3
3,672.9
2,360.2
21,427.8
4,052.1
2,850.0
20,358.9
4,439.3
3,128.3
20,358.0
4,572.6
2,931.8
19,459.3
5,509.3
2,717.0
20,482.7
6,086.5
3,007.2
19,143.7
6,352.8
3,117.1
19,911.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
28,012.3
27,460.9
27,261.0
27,925.6
26,963.6
28,708.9
28,237.4
29,381.4
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . .
12.3
8.9
13.4
8.6
14.9
10.5
15.9
11.2
17.0
10.9
19.2
9.5
21.6
10.7
21.6
10.6
—
—
6.4
-5.3
10.3
20.8
9.6
9.8
3.0
-6.3
20.5
-7.3
10.5
10.7
4.4
3.7
All other . . . . . . . . . . . . . . . . . . . . . . . .
—
-2.9
-5.0
(1)
-4.4
5.3
-6.5
4.0
Total . . . . . . . . . . . . . . . . . . . . . . . . .
—
-2.0
-0.7
2.4
-3.5
6.5
-1.6
4.1
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . .
2,357.9
1,523.7
35,855.2
2,550.7
2,769.2
44,454.5
2,695.8
3,267.7
46,625.1
4,898.0
2,947.7
43,665.7
5,130.8
3,330.8
40,725.2
5,380.4
4,116.9
42,492.7
5,673.4
3,849.5
40,677.0
5,811.5
4,797.9
43,159.2
Total . . . . . . . . . . . . . . . . . . . . . . . . .
39,736.7
49,774.4
52,588.5
51,511.4
49,186.8
51,989.9
50,199.9
53,768.6
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . .
5.9
3.8
5.1
5.6
5.1
6.2
9.5
5.7
10.4
6.8
10.4
7.9
11.3
7.7
10.8
8.9
—
—
—
8.2
81.8
24.0
5.7
18.0
4.9
81.7
-9.8
-6.4
4.8
13.0
-6.7
4.9
23.6
4.3
5.5
-6.5
-4.3
2.4
24.6
6.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
—
25.3
5.7
-2.1
-4.5
5.7
-3.4
7.1
175
See footnote at end of table.
176
Table 5-11—Continued
Agricultural products: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
8,588.4
4,704.0
24,399.4
8,750.1
4,860.0
25,133.1
9,207.4
5,098.8
24,978.3
10,036.3
5,111.0
23,915.2
37,691.8
38,743.2
39,284.4
39,062.5
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,607.3
4,019.1
20,716.2
7,705.7
3,906.7
22,907.0
8,315.0
4,214.0
24,526.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,342.6
34,519.4
37,055.2
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21.1
12.8
22.3
11.3
22.4
11.4
22.8
12.5
22.6
12.5
23.4
13.0
25.7
13.1
4.0
28.9
4.0
16.6
-2.8
10.6
7.9
7.9
7.1
3.3
11.6
-0.5
1.9
3.3
3.0
5.2
4.9
-0.6
9.0
0.2
-4.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.7
10.1
7.4
1.7
2.8
1.4
-0.6
6,848.8
5,916.9
42,047.2
6,775.1
5,351.0
37,692.2
7,164.8
6,006.2
38,761.2
7,429.7
6,671.0
37,143.9
54,812.9
49,818.3
51,932.3
51,244.6
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,960.8
3,537.9
53,246.7
6,167.5
5,387.5
54,093.9
6,696.3
5,018.6
49,135.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,745.4
65,649.0
60,850.3
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9.5
5.6
9.4
8.2
11.0
8.3
12.5
10.8
13.6
10.7
13.8
11.6
14.5
13.0
2.6
-26.3
23.4
3.5
52.3
1.6
8.6
-6.9
-9.2
2.3
17.9
-14.4
-1.1
-9.6
-10.4
5.8
12.3
2.8
3.7
11.1
-4.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.7
4.6
-7.3
-9.9
-9.1
4.2
-1.3
1
Less than 0.5 percent.
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
NAFTA
U.S. agricultural trade with its NAFTA partners has grown rapidly. U.S.
exports to and imports from its NAFTA partners increased by 48.1 percent and
66.6 percent, respectively, during 1993-2001 (table 5-11). The share of both
U.S. agricultural exports to and imports from NAFTA partners continues to
grow, as might be expected from preferential access to each other’s markets.
U.S. agricultural imports from Canada grew from $3.4 billion in 1987 to
$10.0 billion in 2001, while those from Mexico grew from $2.5 billion to $5.1
billion during the same period. U.S. agricultural exports to Canada during this
period grew from $2.4 billion to $7.4 billion, and those to Mexico rose from
$1.5 billion to $6.8 billion. The value of Canadian and Mexican agricultural
exports as shares of total U.S. imports grew from 12.3 percent to 25.7 percent,
and from 8.9 percent to 13.1 percent, respectively, while the shares of U.S.
agricultural exports accounted for by Canadian and Mexican agricultural
imports rose from 5.9 percent to 15.6 percent, and from 3.8 percent to 13.0
percent, respectively.
Although NAFTA contributed to the growth in trade between the 3 NAFTA
partners, much of this growth might have occurred without NAFTA as a result
of unusual weather conditions, population growth, changes in exchange rates,
and macroeconomic performance. Furthermore, many of the concerns
expressed prior to the agreement about the loss of agricultural employment and
environmental degradation never materialized. A USDA study showed that for
most commodities, NAFTA’s influence is relatively small, generating only a
small increase in the export or import of a particular commodity with either
Canada or Mexico. For a handful of commodities, NAFTA has had a much
larger impact, with an increase of trade volume of 15 percent or more that is
directly attributable to the agreement. This is particularly true for commodities
whose trade was severely restricted prior to NAFTA. U.S. rice exports to
Mexico have more than doubled since NAFTA with the reduction of tariffs,
while U.S. cotton exports to Mexico and Canada have tripled. U.S. pear and
apple exports to Mexico have increased by at least 15 percent. Imports of sugar
from Mexico have grown considerably as the sugar quota was liberalized, and
Canadian potato imports have been boosted by U.S. tariff reductions.73
NAFTA’s agricultural component comprises three separate agreements: the
original U.S.-Canada FTA, a U.S.-Mexico component, and a Canada-Mexico
component. Some agricultural provisions, including rules on sanitary and
phytosanitary provisions, are trilateral. Under NAFTA, most quantitative
restrictions on agricultural trade between the United States and Mexico were
eliminated. Many tariffs were eliminated immediately, with others scheduled to
be phased out over periods of 5 to 15 years. By 2008, all agricultural
provisions will be implemented, but most became effective by January 1, 2003.
73 Effects of North American Free Trade Agreement on Agriculture and the Rural
Economy, Agriculture and Trade Reports, USDA, Economic Research Service,
Publication WRS--02--01, July 2002.
177
The agricultural provisions of the U.S.-Canada FTA were incorporated into
NAFTA. Under these provisions, all tariffs affecting agricultural trade
between the United States and Canada, with a few exceptions for items
covered by Uruguay Round tariff-rate quotas (dairy, poultry, eggs, peanut
butter, and sugar products), were removed on January 1, 1998. Mexico and
Canada reached a separate bilateral NAFTA agreement on market access for
agricultural products. The Mexican-Canadian agreement eliminated most
tariffs either immediately or over 5, 10, or 15 years. Tariffs and TRQs
between the two countries affecting trade in dairy, poultry, eggs and sugar
are also maintained.
Uruguay Round
During the Uruguay Round, the negotiating parties agreed to convert all
quantitative restrictions to bound tariffs,74 a process known as ‘tariffication.’
The conversion of NTBs (which in addition to quotas included some import
prohibitions and discretionary import licensing) to bound tariffs was a key
achievement of the Uruguay Round.
Developed countries agreed to reduce all agricultural tariffs, including
those resulting from tariffication from their base-period rates,75 by a total of 36
percent, with a minimum cut of 15 percent for each tariff. The cuts were to
take place in equal installments over 6 years, beginning with the first cut in
1995. Developing countries are bound to cut tariffs an average of 24 percent
over 10 years. Least-developed countries were not required to reduce their
tariffs. Tariff-rate quotas were established for products previously protected by
NTBs with relatively low in-quota tariffs up to a minimum access level.
Although the Agriculture Agreement began the process of reducing agricultural
tariffs, protection for agricultural commodities continues to stand out as a
major distorting feature of international trade. For manufactured goods, the
industrial countries’ import-weighted average tariff has been reduced from
about 40 percent to under 4 percent since 1949; for agricultural goods, in
contrast, the simple average for industrial countries’ post-Uruguay Round
bound tariffs is estimated to be 45 percent.76
Some of the key accomplishments of the Uruguay Round were concessions
and commitments from members regarding market access, domestic support
74 Tariffs are considered legally “bound” within GATT/WTO when a country agrees
not to raise them above a certain level, subject to a penalty.
75 For tariffs that were already bound, the base was the current bound rate; for
existing but unbound tariffs, the base was the 1986 tariff rate; and for duties that resulted
from tariffication of NTBs, the base was the level of protection provided by NTBs during
the 1986--88 period.
76 John Wainio, Paul Gibson, and Daniel Whitley, “Options for Reducing Agricultural Tariffs,” Background for Agricultural Policy Reform in the WTO: The Road
Ahead, USDA, Economic Research Service, 2001, ERS--E01--001.
178
and export subsidies, and the Agreement on Sanitary and Phytosanitary
Measures. Overall, the results of the negotiations provide a framework for
the long-term reform of agricultural trade and domestic policies.
Views of Interested Parties
Blue Diamond Growers77
Blue Diamond Growers is a nonprofit farmer-owned marketing cooperative
that markets almonds, hazelnuts, macadamia nuts, and pistachios for its
members. The almonds are grown exclusively in California and are the largest
tree crop in the State. Almonds are the largest valued agricultural export from
California. Over 75 percent of the world’s supply of almonds is produced in
California.
Tokyo Round and Uruguay Round
Blue Diamond Growers (BDG), and almonds in general, benefitted
significantly from the Tokyo and Uruguay Rounds. These agreements opened
markets for almonds worldwide. As a result of these two agreements, U.S.
almond exports increased by 25 percent to Europe, 1,100 percent to Eastern
Europe, 300 percent to the Middle East, and 200 percent to Asia during
1996-2002.
U.S.-Israel Free Trade Agreement
BDG, and almonds in general, benefitted from the United States-Israel Free
Trade Agreement until the agreement was renegotiated in 1995. U.S. almond
exports were adversely affected by the 1995 changes which increased duties on
U.S. exports of almonds to Israel by a factor of four thereby closing the market
for U.S. exports. In 1997, a TRQ was applied which allowed limited access of
almonds to Israel, but was too restrictive to provide meaningful amounts of
trade. BDG believes that if all barriers to trade with Israel were removed,
almond exports to Israel would grow from about $10 million in 2002 to about
$25 million within five years.
U.S.-Canada Free Trade Agreement
BDG, and almonds in general, benefitted significantly from the
U.S.-Canada Free Trade Agreement which enhanced and stabilized market
access. The value of U.S. almond exports to Canada grew by 90 percent during
1996-2002 reaching $37 million.
77
Susan Brauner, Director of Public Affairs, Blue Diamond Growers, written
submission to the Commission, Mar. 27, 2003.
179
NAFTA
BDG, and almonds in general, benefitted significantly from NAFTA
because it enhanced and stabilized market access. The value of U.S. almond
exports to Mexico grew by about 300 percent during 1996-2002, reaching
about $11 million.
Florida Citrus Mutual 78
Florida Citrus Mutual (FCM) is a voluntary cooperative association whose
active membership consists of more than 11,000 Florida growers of citrus for
processing and fresh consumption. FCM accounts for as much as 80 percent of
all oranges grown in the United States for processing into juice and other citrus
products. The 6-year staged reduction of U.S. tariffs on orange juice from
WTO-member countries under the URA, and the 15-year staged elimination of
the U.S. tariff and tariff rate quota on orange juice from Mexico under NAFTA
encouraged under-priced imports, which contributed directly to the erosion of
U.S. processing orange prices and grower earnings. FCM believes that this
damage occurred without any counterbalancing positive effects on U.S. orange
juice exports.
Uruguay Round
The URA has increased the inflow of under-priced Brazilian orange juice
into the U.S. market with severe negative consequences for the U.S. citrus
industry. Brazil, the world’s largest orange juice producer, was the primary
beneficiary of the United States’ URA commitment to reduce orange juice
tariffs by 15 percent. These staged tariff reductions led to the plunging import
unit value of Brazilian juice. In 2002, the average value per liter of imports
from Brazil was 31 percent less than the average during the 5 years prior to
URA implementation (1990-1994).
NAFTA
NAFTA has adversely affected U.S. orange growers by increasing Mexico’s
exports of orange juice to the United States. The United States has committed
to a 15 year phase-out schedule for U.S. tariffs on Mexican orange juice. The
United States is Mexico’s largest export market for orange juice, and Mexico
has the ability to divert fruit from fresh domestic consumption into orange
juice processing. U.S. imports from Mexico have not risen as rapidly as
expected as a result of NAFTA, primarily owing to droughts and citrus diseases
in Mexico as well as the strong Mexican peso and heavy competition from
Brazil and CBERA-eligible orange juice. However, U.S. imports of frozen
78 Andrew Lavigne, Executive Vice President and CEO, Florida Citrus Mutual and
Matthew T. McGrath, Barnes, Richardson & Colburn, on behalf of Florida Citrus
Mutual, written submission to the Commission, Mar. 31, 2003.
180
concentrated orange juice from Mexico have exceeded the NAFTA TRQ in
every year, except 2001. The primary effect of Mexican imports has been to
erode U.S. prices. In 2002, the average price from Mexico was 25 percent
less than the average during the 5 years prior to NAFTA implementation
(1989-1993).
Florida Tomato Exchange 79
The Florida Tomato Exchange (FTE) represents a substantial majority of
the fresh tomatoes produced in the state of Florida.
During the winter months Florida produces most of the tomatoes grown
commercially in the United States. The FTE supports free trade and open
markets, but only provided such trade is fair. The growers represented by FTE
are not subsidized, do not receive price supports, or deficiency payments, loan
guarantees, or export credit assistance.
NAFTA
Many years prior to passage of NAFTA, FTE presented statements to
Congress, USTR, and USITC that tomatoes were an import-sensitive
commodity and, without meaningful safeguard provisions regarding tomato
imports from Mexico, Florida’s tomato growers would be substantially harmed.
NTE’s recommendations for safeguard provisions were not adopted, but rather
other “traditional” safeguard provisions were used. After NAFTA was enacted
in 1994, Mexico flooded the U.S. market with fresh tomatoes. When NTE
attempted to use the NAFTA safeguard provisions that were intended solely to
assist Florida’s tomato and pepper growers, they were unsuccessful. Estimates
of the harm to NTE’s growers totaled approximately $125 million per winter
season, and over $1 billion to date. A major tomato packing house in Florida
closed its door. The industry estimates that upwards of 10,000 workers in
Florida have lost their jobs as a direct result of NAFTA. The NTE filed an
antidumping suit, and in 1995 the U.S. Department of Commerce preliminarily
found that Mexican producer-exporters dumped tomatoes in the U.S. market. A
suspension agreement was negotiated and a second suspension agreement was
negotiated by Commerce in December 2002. Although the NAFTA package
included transitional assistance for workers displaced by NAFTA, the monetary
and work assistance were deficient and many or most workers did not complete
this training and others who followed and would have been eligible, did not
even try. The only relief that was useful to the industry was the long-standing
antidumping statute.
79
Reginald L. Brown, Executive Vice President, Florida Tomato Exchange, written
submission to the Commission, Feb. 11, 2003.
181
National Milk Producers Federation and U.S. Dairy Export
Council 80
The National Milk Producers Federation (NMPF) is a national farm
commodity organization that represents dairy farmers. The U.S. Dairy Export
Council (USDEC) is a non-profit organization that represents the export trade
interests of U.S. milk producers, dairy cooperatives, proprietary processors,
export traders, and industry suppliers.
Tokyo Round
The Tokyo Round had only “marginal impact on global agricultural trade”
including dairy products. “Unlike the Uruguay Round, which succeeded it, the
Tokyo Round left most non-tariff trade barriers, export subsidies, and domestic
support programs virtually untouched.” Tariffs and other import barriers were
negotiated on the basis of a request/offer approach, which resulted in many of
the most sensitive products being subjected to minimal access improvements or
being excluded from the negotiations altogether. The Tokyo Round also led to
positive agreements, including the International Dairy Agreement and the
cheese quota.
The International Dairy Agreement provided for minimum export prices for
some key dairy products in an attempt to bolster world prices although within
four years of implementation, the EU developed a substantial domestic dairy
surplus and began to export butter at below the minimum agreed prices. In
reaction, the United States withdrew from the Agreement.
“The Tokyo Round agreement on U.S. cheese import quotas helped shield
the industry from heavily subsidized European dairy imports” but also resulted
in higher cheese imports because the United States established quotas above
previous import levels. Prior to this agreement, cheeses valued below certain
fixed prices were permitted to enter the United States only with an import
license, which allowed the government to restrict volumes below levels that
would undermine the dairy price-support program. The Tokyo Round
institutionalized the large, subsidized dairy trade from the EU and consequently
a distorted world dairy trade situation overall.
The U.S.-Canada Free Trade Agreement
Although the U.S.-Canada Free Trade Agreement (CFTA) phased out most
import restrictions and agricultural tariffs over a ten-year period, dairy was
excluded from these commitments and U.S. dairy exporters have virtually no
access to the Canadian market. Canada and the United States agreed to
maintain import quotas on dairy and certain other products.
80 Peter Vitaliano, Ph.D., Vice President, Economic Policy and Market Research,
National Milk Producers Federation, written submission to the Commission, Mar. 31,
2003.
182
NAFTA
“NAFTA has had a positive qualitative and quantitative impact on U.S.
dairy producers and processors.” Under NAFTA, all non-tariff barriers to
agricultural trade between the United States and Mexico were eliminated, and
most tariffs were eliminated over a ten-year period, including those applying to
dairy products. Unlike CFTA, NAFTA provides for the phased elimination of
all dairy tariffs between the United States and Mexico. Stringent rules of origin
were written into NAFTA in order to ensure that the benefits of preferential
access would only accrue to those items produced in North America. Tariffs on
all dairy products reduce to zero over a ten-year phase out period, except on
skim milk powder exported from the United States to Mexico, which will be
eliminated over 15 years.
U.S.-Israel Free Trade Agreement
The U.S.-Israel FTA “has not been beneficial to the U.S. dairy industry.”
Uruguay Round
The Uruguay Round Agreements (URA) “achieved many of the objectives
for improving disciplines for global agricultural trade that could not be
achieved in previous GATT negotiations.” The URA established international
discipline that eased future negotiations although the United States paid a
heavy price to accomplish the agreement in the form of tariff disparities among
countries. “Perhaps the most significant accomplishment of the UR market
access agreement in agriculture was the conversion of all non-tariff measures
into tariffs” including U.S. Section 22 dairy import quotas, EU variable import
levies, and the Canadian and Japanese import licensing systems.
The URA also required countries to reduce agricultural export subsidies by
21 percent in volume terms and 36 percent in budgetary outlays which
primarily affected the EU which, even after the agreement, continues to
maintain about 72 percent of world dairy export subsidies. The export subsidies
commitment left a huge competitive advantage with the EU and helped them
build a market in the United States at the expense of domestically produced
cheese, butter, and milk protein powders.
Further, the URA required all countries to establish ceilings for the amount
of support afforded producers through internal support mechanisms. The
agreement left the EU with a “huge competitive advantage” that has “harmed
the U.S. dairy industry.” “On the other hand, expenditures in programs such as
the de minimis clause as well as the green box have assisted the [U.S.] dairy
industry as well as the U.S. agriculture overall.”
183
The Ranchers-Cattlemen Action Legal Fund-United
Stockgrowers of America 81
The Ranchers-Cattlemen Action Legal Fund - United Stockgrowers of
America (R-CALF USA) is a non-profit association that represents thousands
of U.S. cattle producers on issues concerning national and international trade
and marketing. R-CALF USA’s membership consists primarily of cow-calf
operators, cattle backgrounders, and feedlot owners. Its members are located in
42 states, and the organization has over 30 local and state cattle association
affiliates.
U.S.-Canada FTA and NAFTA
For live cattle, there was a significant increase in imports from Canada.
Prior to the USCFTA, imports of Canadian cattle into the United States
remained flat and averaged 368,000 head per year from 1978 to 1988. In 1989,
U.S. imports began a generally strong upward trend with imports during the
past five years averaging over 1,160,000 head annually. Live cattle imports
from Mexico, on the other hand, have not increased. For the five years prior to
NAFTA, imports from Mexico averaged 1,089,379 head annually, but for the
most recent five year period averaged only about 938,177 annually. U.S.
exports of live cattle to Canada are restricted, but a post-NAFTA agreement,
the Northwest Pilot Program, has led to increased exports when certain sanitary
conditions are met. U.S. shipments of live cattle to Canada grew from 40,000
head in 1996 to 349,536 head in 2000. U.S. exports of live cattle to Mexico
have generally increased since NAFTA, from 62,683 head in 1994, to 363,887
head in 2001.
U.S. imports of beef from Canada increased markedly following the
USCFTA, growing from 81,138 metric tons in 1990 to 335,163 metric tons in
2000. During the same time period, U.S. exports of beef to Canada remained
flat, slipping from 90,892 in 1991 to 87,480 metric tons in 2000. U.S. beef
exports to Mexico have grown significantly following NAFTA. Since 1995,
U.S. exports have risen steadily with export volumes some 2.5 times greater
than in the years prior to NAFTA, to about 178,749 metric tons, and worth
some $531 million. U.S. beef imports from Mexico have increased
considerably since NAFTA, growing from 591,340 kilograms in 1994 to
3,412,582 kilograms in 2001, worth about $15 million.
Prior to the USCFTA and NAFTA, U.S. tariffs on imports of Canadian and
Mexican beef limited access into the U.S. market. However, the U.S. Meat
Import Law, which was replaced by a tariff rate quota during the Uruguay
Round, was even more important in controlling the amount of imported beef
entering the U.S. market.
81
Leo R. McDonnell, Jr., President, R--CALF USA, written submission to the
Commission, Feb. 14, 2003.
184
Tokyo Round
Prior to the completion of the Tokyo Round, Japan controlled imports of
beef through quotas. During the Tokyo Round, the United States sought a
larger allotment within Japan’s quota for higher quality grain-fed beef. An
agreement was reached between the United States and Japan in 1978 and led to
increased access for U.S. beef in the Japanese market.
U.S. Israel Free Trade Area Agreement
In 1985, the United States and Israel signed an FTA calling for the phasing
out of tariffs by 1995. In 1996, the United States and Israel signed the
Agreement on Trade in Agricultural Products (ATAP). The ATAP was set to
expire on Dec. 31, 2001. However, it was extended through 2002 with tariffs
and tariff rate quotas maintained at 2001 levels. Despite the FTA, exports of
U.S. frozen beef to Israel were, as of 2001, subject to a TRQ of 8815 metric
tons, and fresh and chilled U.S. beef was subject to a TRQ of 1,217 metric
tons. In-quota imports of these products enter duty-free. U.S. beef exports to
Israel are small totaling only $203,000 in 2001, mostly frozen product. An
important impediment to U.S. beef exports to Israel is the Israeli Kosher Meat
Import Law of 1994, which bans the importation of any meat or meat product
that is not certified as kosher by Israel’s chief rabbinate.
Uruguay Round
The Uruguay Round promoted U.S. exports of beef to Japan and Korea,
but not the EU. As part of the Uruguay Round, the United States and Japan
signed the Beef-Citrus Agreement which phased out Japan’s import quota and
25 percent tariff on beef. These were replaced with a 70 percent tariff in 1991,
which was reduced to 60 percent in 1992 and 50 percent in 1993. The phasing
out of Japan’s quota had a dramatic impact on U.S. exports of beef and offal to
Japan, which rose by almost 90 percent by value from 1988 to 1990. During
this time, exports by volume rose by 50 percent. The Beef-Citrus Agreement,
while not necessarily part of the formal Uruguay Round negotiations, was
negotiated after the Uruguay Round began. Concessions made by Japan during
Uruguay Round continue to benefit the U.S. beef industry. The United States is
the main beef exporter to Japan with 48 percent of Japan’s import market.
The Beef-Citrus Agreement between the United States and Japan served as
a model for opening the Korean market to imports of U.S. beef. During
Uruguay Round negotiations, Korea and the United States reached agreement
on global access to the Korean beef market. Under the Uruguay Round
Agreement on Agriculture, Korea agreed to increase its minimum imports of
beef two-fold to 225,000 metric tons by 2000. Imports of beef by Korea would
be unrestricted as of 2001, but a tariff of 41.2 percent would be imposed on
such imports, which would decrease to 40 percent in 2004. The U.S. beef
industry has benefitted from concessions made by Korea during Uruguay
Round negotiations. In 2001, U.S. exports to Korea constituted 57 percent of
Korea’s beef imports.
185
In contrast to Japan and Korea, the outcome of Uruguay Round
negotiations with regard to cattle and beef with the EU has not been positive
for U.S. producers. Despite a finding of the WTO that the EU’s ban on the
importation of beef treated with growth promoting hormones violates the SPS
Agreement, the EU continues to block shipments of most U.S. beef.
Furthermore, while the EU made cuts in subsidies for the cattle and beef
industry as a result of the Uruguay Round, this sector retains strong
government support. The EU’s cattle producers remain heavily subsidized, and
the 2002 budget for the EU’s beef sector was approximately $8.2 billion, or
about 17 percent of the EU’s agricultural budget. As part of its Uruguay Round
commitments, the EU agreed to reduce export subsidies for beef from 1.9
billion ECUs in 1995 to 1.3 billion ECUs in 2000. This amounted to a 26
percent cut in export subsidies for beef. According to the USDA, export
refunds provided by the EU in 2000 for beef totaled $750 million. The U.S.
live cattle industry, by contrast, receives little government support, and in 2000
provided no beef export subsidies to producers.
Chemicals and Allied Products82
Overview
The United States is one of the world’s largest producers of chemicals and
allied products, along with Japan and the EU. The value of U.S. shipments was
an estimated $623 billion83 in 2001, accounting for approximately 25 percent
of the world total (table 5-12).84 In 2001, domestic shipments of basic
chemicals85 and pharmaceuticals86 each accounted for approximately 18.0
percent of total domestic chemical industry shipments.87 Other industry
subsectors with significant domestic production are the soaps, cleaning
compounds and toilet preparations subsector (9 percent) and the plastics and
rubber products subsector (25 percent).88
Of the more than 2,500 companies producing chemicals in the United
States, multinational firms, both U.S. and foreign-based, accounted for the
82
For the purposes of this investigation, chemicals and allied products comprise SIC
groups 28 and 30.
83 Current dollars.
84 “Finances: Industry Pulled Back Again,” Chemical & Engineering News, June 24,
2002, pp. 44--45.
85 NAICS code 3251. Includes basic organic and inorganic chemicals, industrial
gases, dyes and pigments.
86 NAICS code 3254.
87 “Finances: Industry Pulled Back Again,” Chemical & Engineering News, June 24,
2002, p. 45.
88 Ibid.
186
Table 5-12
Chemicals and allied products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption
and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
370.1
29.1
34.6
364.6
5.5
366.4
28.9
34.9
360.5
5.9
408.1
30.3
39.3
399.1
9.0
444.7
35.3
46.8
433.2
11.5
461.7
36.2
49.1
448.7
13.0
7.8
9.7
8.0
9.3
8.0
9.5
7.6
9.6
8.2
10.5
8.1
10.6
1,862
1,215
1,862
1,209
1,844
1,206
1,867
1,227
1,923
1,270
1,962
1,295
13.59
13.67
13.62
13.52
13.39
306
304
333
350
357
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
357.8
18.9
30.8
345.9
11.9
372.3
20.2
38.9
353.6
18.7
367.9
21.4
42.8
346.5
21.4
374.6
22.2
41.1
355.7
18.9
341.5
20.2
36.0
325.8
15.7
Imports/apparent
consumption . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . .
5.5
8.6
5.7
10.5
6.2
11.7
6.2
11.0
6.2
10.5
Total employment . . . . . . . . . . . . .
Production workers . . . . . . . . . .
1,888
1,250
1,930
1,276
1,871
1,214
1,881
1,225
1,804
1,156
Hourly earnings . . . . . . . . . . . .
13.06
13.02
13.09
13.14
13.39
286
292
303
306
295
355.3
24.4
35.6
360.2
11.3
378.5
28.7
36.9
370.4
8.1
Percentage
6.8
9.6
1,000 workers
1,786
1,153
Constant (1996) dollars
13.54
13.51
$1,000 per worker
Labor productivity . . . . . . . . . . . . .
See footnote at end of table.
308
312
187
188
Table 5-12—Continued
Chemicals and allied products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption
and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
549.9
65.4
77.8
537.6
12.3
550.0
69.8
76.1
543.6
6.4
551.7
77.9
77.5
552.1
-0.4
570.5
88.3
86.1
572.7
-2.1
543.5
90.0
83.0
550.6
-7.1
12.2
14.1
12.8
13.8
14.1
14.1
15.4
15.1
16.4
15.3
2,032
1,345
2,048
1,366
2,044
1,369
2,045
1,367
1,980
1,302
13.44
13.69
13.89
14.11
14.31
409
403
403
417
417
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
460.1
36.8
51.3
445.6
14.5
451.0
37.2
54.3
434.0
17.0
456.2
41.1
54.4
442.9
13.3
465.4
42.9
54.5
453.7
11.7
488.5
48.0
61.3
475.2
13.3
517.0
55.1
70.2
501.8
15.1
518.1
59.7
70.6
507.3
10.9
Percentage
Imports/ apparent
consumption . . . . . . . . . . . . . . .
Exports/ shipments . . . . . . . . . . .
8.3
11.2
8.6
12.0
9.3
11.9
9.5
11.7
10.1
12.6
Total employment . . . . . . . . . . . . .
Production workers . . . . . . . . . .
1,974
1,287
1,938
1,242
1,962
1,234
1,990
1,276
2,010
1,319
Hourly earnings . . . . . . . . . . . .
13.32
13.30
13.36
13.27
13.16
358
363
370
365
370
11.0
13.6
11.8
13.6
1,000 workers
2,018
1,343
2,017
1,337
Constant (1996) dollars
13.20
13.36
$1,000 per worker
Labor productivity . . . . . . . . . . . . .
1
385
387
Includes SIC 28 (chemicals and allied products) and 30 (rubber and miscellaneous plastics products).
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics.
majority of production. These major producers are extremely diversified,
producing a broad spectrum of products. Typically, they are also vertically
integrated throughout most of the chemical production scheme, from the
production of building-block chemicals through chemical intermediates to
final products. Of the 50 largest chemical-producing firms worldwide, 17 are
U.S.-based, and approximately 18 others have active chemical plants in the
United States.89 Additionally, there are many specialized firms that produce a
very limited range of products, and depend on larger diversified firms for
their raw materials.
Chemical production90 closely parallels overall U.S. manufacturing output
over the period 1978-2001.91 Shipments of the chemicals and allied products
industry increased from $358 billion (in constant 1996 dollars) in 1978 to
nearly $571 billion in 2000. In 2001, the recession coupled with an excess of
inventoried materials caused shipments to decline to $543 billion.92 The trends
in apparent consumption closely echo the patterns of domestic production,
although the ratio of imports to consumption increased from 5.5 percent in
1978 to 16.4 percent in 2001. Apparent consumption increased from $346
billion to $551 billion in 2001, an increase of more than 59 percent. U.S.
production continued to supply the overwhelming majority of demand from the
domestic market for chemicals, plastics, pharmaceuticals, and rubber products.
U.S. exports of chemicals and allied products steadily increased along with
U.S. production in recent years and accounted for 15.3 percent of U.S.
shipments in 2001 as compared to 8.6 percent in 1998. The composition of
U.S. exports closely mirrors U.S. production. The industry is a major supplier
of chemical raw materials and intermediates, as well as finished chemical
products to many foreign markets. Generally, the majority of U.S. chemical
trade involves inter-company transfers or trade between associated firms. As
such, the patterns of trade remains fairly steady from year-to-year.
Employment in the U.S. chemicals and allied products industry increased
slightly from 1.9 million workers in 1978 to 2.0 million in 2000, before
89
“Global Top 50,” Chemical & Engineering News, July 23, 2001, pp. 23--27.
Industrial production indices published by the American Chemical Society in the
journal Chemical & Engineering News. “Facts & Figures,” Chemical & Engineering
News, June 10, 1985, p. 27; “Facts & Figures,” Chemical & Engineering News, June 23,
1997, p. 41; and “Facts & Figures,” Chemical & Engineering News, June 24, 2002, p.
61.
91 Exceptions include instances that arose from rapidly increasing or decreasing
feedstock (and natural gas) prices or changes in the availability of feedstock materials,
particularly during the late 1970s.
92 “At Last, Chemical Earnings Rise,” Chemical & Engineering News, Aug. 19,
2002, p. 19.
90
189
decreasing by 3.2 percent in 2001.93 Labor productivity over the 1978-2001
period increased considerably, as a result of technical improvements. The
industry made considerable efforts several times during this period to
restructure and re-engineer production pathways to remove bottlenecks that
had previously impaired productivity. Most of these efforts occurred as a
direct result of unexpected stresses on the domestic industry.
U.S. chemical sector wages remain higher than the average for overall U.S.
manufacturing, and increased during 1978-2001, from $13.06 per hour to
$14.31 per hour. In 1982, workers in the chemicals and allied product sector
earned wages 17 percent higher than the average for overall U.S.
manufacturing, and in 2001 chemicals and allied products industry workers
earned wages more than 25 percent higher.94
The chemical sector has continuously worked to increase efficiencies of
production, remaining mindful of the painful rationalizations of the late 1970s
and early 1980s. At the present time, the large multinational producers that
dominate the U.S. industry have significant competitive advantages due to their
size and structure, which provide economies of scale and easier access to
capital.
According to various industry analysts,95 the U.S. chemical industry has
become less competitive in recent years. Cost differentials for major feedstock
materials are the major disadvantage of the U.S. industry vis-à-vis petroleumand gas-rich nations with developed and developing chemical industries,
particularly those in East Asia and the Middle East. Expensive domestic
environmental regulations also place an additional cost burden on U.S.
producers, as well as producers in the EU and Japan.96 Rising worldwide
feedstock costs since 2000, declining world product demand, increasing foreign
chemical production capacity, and the strong dollar have made it increasingly
difficult for U.S. chemical producers to compete in U.S. and foreign markets.
The result has been a significant downward pressure on U.S. chemical industry
earnings.97 This temporary industry weakness and the strength of the dollar has
made the U.S. market more attractive to foreign producers.98
93
Employment data obtained from Bureau of Labor Statistics database; based on
SIC code 28, chemicals and allied products, retrieved from
http://data.bls.gov/cgi--bin/dsrv on Aug. 14, 2002 and from
http://146.142.4.24/cgi--bin/surveymost, on May 24, 2001 and “Employment: Cuts Continued Trend,” Chemical & Engineering News, June 24, 2002, pp. 66--67.
94 “Employment: Cuts Continued Trend,” Chemical & Engineering News, June 24,
2002, p. 66--67.
95 “World Chemical Outlook,” Chemical & Engineering News, Dec. 17, 2001, p. 26.
96 Ibid.
97 Ibid., pp. 26--28.
98 Ibid., pp. 26.
190
Domestic production capacity for primary petrochemicals expanded during
the late 1990s to meet expected downstream growth. When downstream growth
fell short of expectations, serious oversupplies of certain key chemical building
blocks, particularly ethylene, resulted and some domestic firms were forced to
shut down operating facilities that were becoming non-competitive.99
Continued overseas capacity expansions in Saudi Arabia, China, and Singapore
also added significantly to world production capacity. As a result, U.S. industry
capacity utilization continued to decline through the end of 2001.
The pharmaceutical industry was the fastest growing chemicals subsector
during 1978-2001. U.S. pharmaceutical shipments during 1978-2000 increased
222 percent to $85.4 billion in 2000 before declining to $80.8 billion in
2001.100 This growth resulted from several factors, including the passage of
major trade agreements, advancements in medical knowledge, and increased
standards of living. For the United States, growth occurred in both domestic
and overseas sales (through international trade or overseas subsidiaries).101
Historically, the U.S. pharmaceutical industry has been composed of large
multinational companies headquartered in Europe, the United States, and Japan.
In the last 20 years there have been multiple mergers of companies
headquartered in different countries, i.e. the mergers of Glaxo (United
Kingdom) and Smith Kline (United States).102 In addition, virtually all
research-based pharmaceutical companies have production facilities located
throughout the world that manufacture active ingredients and/or finished
products. Generic producers have also become a major influence in the
pharmaceutical industry both domestically and throughout the rest of the world.
By increasing price competition, generic producers have had a significant effect
on domestic and global pharmaceutical markets.
The pharmaceutical industry also has been subject to structural change,
differing international regulations, and industrial policies that have affected
production, sales, trade and profits. In addition, the rapid increase in medical
research and development during this period has resulted in a number of new
and very profitable products, which are protected by multi-year patents. This
profitability is enhanced by the fact that these products are not sold directly to
the consumer, but rather are prescribed by a physician, with insured patients
paying only a portion of the cost. Finally, the United States, relative to most
99 “2001 Chemical Industry Review,” Chemical & Engineering News, Dec. 24,
2001, pp. 13--17.
100 In constant 1996 dollars, compiled from official statistics of the BEA.
101 Data collected by the Pharmaceutical Research and Manufacturers of America
show that domestic sales and overseas sales by domestic companies (in current dollars)
increased 908 percent from $16 billion in 1978 to $149 billion in 2000.
102 “Business Concentrates,” Chemical & Engineering News, Mar. 18, 2002, pp.
12--13 and “Pfizer Captures Pharmacia,” Chemical & Engineering News, July 22, 2002,
p. 9.
191
other countries, has very few direct price controls, giving companies the
opportunity to charge higher prices.103 Under such circumstances, tariff
reductions have not been shown to be a major influence on pharmaceutical
prices.
Effect of Trade Agreements on the Sector
Although the 5 major trade agreements that are the subject of this
investigation have had a significant effect on this sector, trade patterns were
affected to a far greater extent by other factors, both economic and
technological in nature. Among these factors are continued product and process
innovations and development in both the industrial segment and the
commercial segment of the sector. Such innovations during the past 20 years
significantly improved U.S. competitiveness by allowing the chemical
production process to become much more efficient. Constant innovation in the
sector which allowed for a broadening of product usage, particularly in the area
of plastics and other synthetic composite materials provided for growth through
replacement of such “traditional” materials as metals and glass. Table 5-13
presents trade issues addressed by the subject trade agreements that were
relevent to the sector.
Tokyo Round
During 1980-2001, total trade in the chemicals and allied products sector
increased at an average annual rate of 4.9 percent, exceeding the 3.5 percent
overall rate for all manufacturing sectors. Imports of sector products increased
at a rate exceeding 7.0 percent, reaching $90 billion in 2001. In contrast,
exports increased at a rate of only 3.2 percent, reaching $83 billion in 2001,
creating a sectoral trade deficit during 1999-2001 after maintaining a surplus
throughout 1978-98. Overall, the trade surplus reached its highest level ($21.4
billion) in 1980, and fluctuated somewhat erratically downward during the rest
of 1981-2001. Much of the variation and fluctuation seen in both the import
and export statistics for this period is derived from pricing changes for sector
goods.104
The effect of the Tokyo Round on the U.S. chemical and allied products
sector likely was less significant than other factors influencing the sector.
Increased domestic industrial efficiencies resulting from the need to compete in
a rapidly changing world chemical market, and technological innovations
throughout the sector, particularly during the late 1980s and early 1990s, had a
much more pronounced effect on sector trade and output.
103
This environment is changing, as the government and group health companies
are developing policies to reduce drug prices.
104 This resulted from irregular changes in the cost of many of the industry sector’s
primary inputs, related to changes in the price of energy materials such as crude
petroleum and natural gas.
192
Table 5-13
Chemicals and allied products: Trade issues addressed in trade agreements and U.S. tariffs
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1979) 0.1%
(1987) 0.6%
(1984) NA
(1995) NA
(1987) 0.5%
(1998) <0.1%
(1994) 0.6%
(1999) 0.4%
(1993) 0.2%
(2001) <0.1%
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Import licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Trade issues and U.S. tariffs
Customs valuation . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Government procurement . . . . . . . . . . . . . . . . . . . .
X
X
X
Offsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Rules of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
X
X
X
X
TRIMs3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
TRIPs4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
1
2
The NAFTA provides that tariffs will be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2008 for all other goods.
Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the world
uring the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates in
parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
3 Trade-related investment measures.
4 Trade-related aspects of intellectual property rights.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative, Trade
Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
193
U.S.-Israel FTA105
There was little or no impact on overall U.S. trade of chemicals and allied
products as a result of the U.S.-Israel FTA. Although total trade with Israel in
this sector increased at an average annual rate of 10.5 percent during
1984-2001, exceeding the 5.9 percent rate for the overall sector, Israel
accounted for less than 0.9 percent of sector trade in 2001. Much of the
increase in trade resulted from growth in Israeli demand and significant growth
in Israel’s chemical sector, particularly in pharmaceuticals. For example, during
1989-2001, U.S. imports of pharmaceutical preparations106 increased from
$479,000 to more than $502 million, accounting for almost one-half of the
$1.1 billion of U.S. sectoral imports from Israel in 2001 (table 5-14).
The U.S.-Canada FTA
There was, at most, a modest impact on total U.S. trade of chemicals and
allied products as a result of the U.S.-Canada FTA. Total trade with Canada in
this sector increased at an average annual rate of 9.3 percent during 1987-2001,
exceeding the 5.9 percent rate for the overall sector. U.S. sectoral imports from
Canada increased from $5.4 billion in 1987 to $20.8 billion in 2001,
representing an average annual rate of growth of 10.1 percent, while sectoral
U.S. exports to Canada increased at an average annual rate of 9.6 percent,
reaching $18.7 billion in 2000, before declining to $17.6 billion in 2001 (table
5-15). Although cross-border trade of plastics107 and industrial organic
chemicals108 used by the chemical sector increased modestly, much of the
growth in trade in the chemicals sector is due to increases in the unit values of
traded pharmaceuticals, among the fastest growing industries within the sector.
NAFTA
There was, at most, a modest impact on trade of chemicals and allied
products as a result of the NAFTA. U.S. sector trade with Canada and Mexico
increased at an average annual rate of 9.3 percent growth during 1994-2000,
before declining by 2.5 percent during 2000-2001. Total sector imports from
Canada and Mexico increased by 85.3 percent during 1994-2001 and total U.S.
sector exports to Canada and Mexico increased by 53.0 percent. During the
period, U.S. sectoral imports from sources other than Canada and Mexico rose
by 88 percent, while U.S. sectoral exports to markets other than Canada and
Mexico increased by 29 percent suggesting a measurable positive effect on
U.S. sector exports to Mexico.
105
1995.
106
The U.S.--Israel FTA was signed in 1985 and was fully implemented on Jan. 1,
SIC classification 2834.
SIC classification 2821.
108 SIC classification 2869.
107
194
Table 5-14
Chemical and allied products: U.S. trade with Israel, 1984-2001
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
263.4
35,034.1
320.5
35,835.8
349.0
36,413.6
346.8
36,876.3
371.1
40,728.2
35,297.5
36,156.3
36,762.6
37,223.1
41,099.3
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . .
167.3
28,558.7
211.8
28,881.5
215.1
28,705.9
244.1
30,040.6
Total . . . . . . . . . . . . . . .
28,726.0
29,093.3
28,921.0
30,284.7
Percent
Israel/Total . . . . . . . . . . . . .
US. import growth
Israel . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . .
0.6
0.7
0.7
0.8
0.8
0.9
1.0
0.9
0.9
—
—
26.6
1.1
1.6
-0.6
13.5
4.7
7.9
16.6
21.7
2.3
8.9
1.6
-0.6
1.3
7.0
10.5
Total . . . . . . . . . . . . . . .
—
1.3
-0.6
4.7
16.6
2.4
1.7
1.3
10.4
175.0
46,621.5
183.4
48,943.2
220.5
51,079.2
249.8
54,004.7
265.3
54,104.0
46,796.4
49,126.6
51,299.7
54,254.6
54,369.3
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . .
112.4
36,735.9
115.4
34,458.7
124.8
34,732.3
148.2
39,181.3
Total . . . . . . . . . . . . . . .
36,848.3
34,574.1
34,857.1
39,329.4
Percent
Israel/Total . . . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . .
0.3
0.3
0.4
0.4
0.4
0.4
0.4
0.5
0.5
—
—
2.6
-6.2
8.2
0.8
18.7
12.8
18.1
19.0
4.8
5.0
20.3
4.4
13.3
5.7
6.2
0.2
Total . . . . . . . . . . . . . . .
—
-6.2
0.8
12.8
19.0
5.0
4.4
5.8
0.2
See notes at end of table.
195
196
Table 5-14—Continued
Chemical and allied products: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
664.7
64,762.2
727.7
69,045.5
728.9
77,214.2
861.7
87,414.3
1,091.3
88,951.1
65,427.0
69,773.3
77,943.1
88,276.0
90,042.4
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . .
455.6
42,405.8
531.0
47,474.2
544.1
54,554.8
625.2
59,091.6
Total . . . . . . . . . . . . . . . .
42,861.4
48,005.2
55,098.9
59,716.9
Percent
Israel/Total . . . . . . . . . . . . . .
US. import growth
Israel . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . .
1.1
1.1
1.0
1.1
1.0
1.0
0.9
1.0
1.2
22.8
4.1
16.6
12.0
2.5
14.9
14.9
8.3
6.3
9.6
9.5
6.6
0.2
11.8
18.2
13.2
26.7
1.8
Total . . . . . . . . . . . . . . . .
4.3
12.0
14.8
8.4
9.6
6.6
11.7
13.3
2.0
372.3
77,378.5
379.5
75,743.9
367.9
77,161.9
403.1
85,737.4
435.3
82,537.6
77,750.8
76,123.4
77,529.7
86,140.5
82,973.0
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . .
232.7
54,308.6
260.1
61,079.4
333.3
69,900.4
365.9
70,229.5
Total . . . . . . . . . . . . . . . .
54,541.3
61,339.5
70,233.6
71,595.3
Percent
Israel/Total . . . . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . .
0.4
0.4
0.5
0.5
0.5
0.5
0.5
0.5
0.5
-12..3
0.4
11.8
12.5
28.1
14.4
9.8
0.5
1.8
10.2
1.9
-2.1
-3.1
1.9
9.6
11.1
8.0
-3.7
Total . . . . . . . . . . . . . . . .
0.3
12.5
14.5
0.5
10.1
-2.1
1.9
11.1
-3.7
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
Table 5-15
Chemical and allied products: U.S. trade with Canada and Mexico, 1987-2001
Year
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1987
1988
1989
1990
1991
Millions of constant (1996) dollars
1992
1993
1994
5,383.7
892.8
24,008.2
30,284.7
6,385.4
1,285.8
27,626.4
35,297.5
7,075.0
1,126.1
27,955.3
36,156.3
7,360.6
1,187.4
28,214.6
36,762.6
7,534.5
1,264.0
28,424.6
37,223.1
8,592.1
1,476.6
31,030.7
41,099.3
9,594.6
1,457.0
31,809.8
42,861.4
11,587.9
1,937.2
34,480.1
48,005.2
17.8
3.0
18.1
3.6
19.6
3.1
20.0
3.2
20.2
3.4
20.9
3.6
22.4
3.4
24.1
4.0
—
—
—
—
18.6
44.0
15.7
16.6
10.1
-12.4
1.2
2.4
4.0
5.5
9.3
1.7
2.4
6.5
7.4
1.3
14.0
16.8
9.2
10.4
11.7
-1.3
2.5
4.3
20.8
33.0
8.4
12.0
9,534.6
3,823.8
40,896.2
54,254.6
10,191.7
4,511.1
39,666.5
54,369.3
11,239.1
4,881.9
38,420.3
54,541.3
12,480.3
6,238.2
42,621.0
61,339.5
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,714.1
2,508.5
31,106.9
39,329.4
6,387.2
3,237.8
37,171.4
46,796.4
6,560.7
3,413.0
39,152.9
49,126.6
9,129.7
3,525.9
38,644.1
51,299.7
14.5
6.4
13.7
6.9
13.4
7.0
17.8
6.9
17.6
7.1
18.8
8.3
20.6
9.0
20.4
10.2
—
—
—
—
11.8
29.1
19.5
19.0
2.7
5.4
5.3
5.0
39.2
3.3
-1.3
4.4
4.4
8.5
5.8
5.8
6.9
18.0
-3.0
0.2
10.3
8.2
-3.1
0.3
11.0
27.8
10.9
12.5
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See notes at end of table.
197
198
Table 5-15—Continued
Chemical and allied products: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
16,539.3
3,443.5
49,790.5
17,579.2
3,901.1
56,462.9
20,048.9
4,214.9
64,012.2
20,802.1
4,255.2
64,985.1
69,773.3
77,943.1
88,276.0
90,042.4
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,779.7
2,535.5
38,783.7
14,588.6
2,822.8
42,305.5
16,261.2
3,286.9
45,878.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55,098.9
59,716.9
65,427.0
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.0
4.6
24.4
4.7
24.9
5.0
23.7
4.9
22.6
5.0
22.7
4.8
23.1
4.7
18.9
30.9
12.5
14.8
5.9
11.3
9.1
8.4
11.5
16.4
8.5
9.6
1.7
4.8
8.5
6.6
6.3
13.3
13.4
11.7
14.1
8.1
13.4
13.3
3.8
0.1
1.5
2.0
16,507.3
9,467.6
50,148.5
17,622.5
10,049.2
49,858.0
18,712.3
12,082.6
55,345.7
17,636.4
10,996.0
54,340.5
76,123.4
77,529.7
86,140.5
82,973.0
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,522.7
5,877.3
50,833.6
14,404.7
7,034.9
49,155.8
15,921.8
8,603.2
53,225.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,233.6
70,595.3
77,750.8
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19.3
8.4
20.4
10.0
20.5
11.1
21.7
12.4
22.7
13.0
21.7
14.0
21.3
13.3
8.4
-5.8
19.3
14.5
6.5
19.7
-3.3
0.5
10.5
22.3
8.3
10.1
3.7
10.1
-5.8
-2.1
6.8
6.1
-0.6
1.9
6.2
20.2
11.0
11.1
-5.8
-9.0
-1.8
-3.7
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
Uruguay Round
During 1995-2001, total U.S. trade in the chemicals and allied products
sector increased at an average annual rate of 5.6 percent, exceeding the
3.9 percent rate of growth in the manufacturing sector. Import growth exceeded
8.5 percent, reaching $90 billion in 2001, while export growth averaged
3.0 percent, reaching $86.1 billion in 2000, before declining to $83 billion in
2001. The sector trade balance began declining in 1995, and became negative
for the first time in 1999. The decline in the U.S. sector trade balance can
largely be attributed to changing international trade patterns, increasing
competition from firms locating overseas, and the decreasing competitiveness
of the U.S. industry.
However, there have been some significant effects of the URA on an
industry level within this sector. In particular, the U.S. pharmaceutical industry
was affected by the Uruguay Round Elimination of Duties on Pharmaceuticals
and the TRIPS Agreement. When the Uruguay Round Agreements (URA) went
into effect on January 1, 1995, 17 countries (eventually increasing to 21)
agreed to eliminate tariffs on approximately 7,000 finished and intermediate
pharmaceutical products.109 The average pre-URA rates for pharmaceutical
products eliminated under the zero for zero110 agreement were 5.89 percent for
the EU, 4.73 percent for Japan, and 4.23 percent for the United States.111
Because the costs of developing new pharmaceuticals are substantial and
the enforcement of patent rights is an important element in recouping costs, the
TRIPS agreement likely has had a positive influence on the growth of the
industry. In particular, the TRIPS agreement extends U.S. patents on
pharmaceutical (and other) products, patented since the treaty was ratified,
from 17 to 20 years.112
Additionally, during the period under consideration, some countries have
unilaterally introduced commercial policies to stimulate economic
development. As chemical synthesis of pharmaceutical products is often a
multi-step process, with different steps potentially taking place in different
109
They are currently listed in the Pharmaceutical Appendix to the Harmonized
Tariff Schedules (HTS). Basically, the general (NTR) tariffs were eliminated on all
finished pharmaceutical products listed in chapter 30, and active ingredients listed in
chapter 29 under the sub--headings 2936, 2937, 2939, and 2941. Background information
is found in USITC, inv. No. 332--402, Advice Concerning the Addition of Certain
Pharmaceutical Products and Chemical Intermediates to the Pharmaceutical Appendix to
the Harmonized Tariff Schedule of the United States, Apr. 1999.
110 See USITC, inv. No. 332--402, Advice Concerning the Addition of Certain
Pharmaceutical Products and Chemical Intermediates to the Pharmaceutical Appendix to
the Harmonized Tariff Schedule of the United States, Apr. 1999.
111 David Michels and Elizabeth Nesbitt, “The Uruguay Round Elimination of
Duties on Pharmaceuticals: Developments in the 2 Years Since Implementation,”
Industry Trade and Technology Review, Oct. 1997, pp. 1--12.
112 Post--hearing submission of the Generic Pharmaceutical Association.
199
countries, the elimination of tariffs among participating countries should
increase the efficiency with which pharmaceutical goods are produced.
However, beginning in the 1990s, Ireland introduced a regime of low
corporate tax rates with the intention of attracting high-tech companies to
manufacture in Ireland. With this tax structure and companies’ use of transfer
pricing incentives, Ireland soon became a major producer and exporter of
pharmaceutical products.113 Irish exports of pharmaceutical products to the
United States increased from $635 million in 1995 to almost $12 billion in
2001.114
Views of Interested Parties
Generic Pharmaceutical Association115
The Generic Pharmaceutical Association (GPA) represents more than 140
companies that manufacture and support the generic pharmaceutical industry
and whose membership accounts for more than 90 percent of generic drugs
dispensed in the United States.
GPA supports the need for both pharmaceutical innovation and the
preservation of intellectual property rights, as provided for in the trade
negotiations conducted over the last two decades. The association notes,
however, that their membership is uniquely impacted by the agreements on
intellectual property, and as a consequence, increased oversight is required to
insure that its interests are appropriately addressed.
Under the Uruguay Round, the TRIPS agreement established a patent term
of 20 years, for products patented after June 7, 1995. This agreement obliged
the United States to lengthen patent terms from 17 years to 20 years, thereby,
increasing the time during which the consumer is denied access to lower-priced
pharmaceuticals. GPA cited a 1995 study that calculated “(t)he annual generic
savings lost by American consumers due to delayed generic entry will range
from $200 million in some years to $500 million in other years.”116 This study
also calculated that the U.S. Government could lose $1.25 billion over the two
years following the publication’s release, based on purchases for Medicaid,
Medicare, the Veteran’s Administration, and the Department of Defense.
113 Clay Boswell and Feliza Mirasol, “Sourcing Pharmaceutical Manufacturing from
Offshore Facilities,” Chemical Marketing Reporter, Oct. 25, 1999, p. 28.
114 U.S. International Trade Commission, Shifts in U.S. Merchandise Trade, various
years.
115 Kathleen D. Jaeger, R.Ph., J.D, President & CEO, Generic Pharmaceutical
Association, written submission to the Commission, Feb. 14, 2003.
116 Stephen W. Schondelmeyer, “Economic Impact of GATT Patent on Currently
Marketed Drugs,” PRIME Institute, College of Pharmacy, University , Mar. 1995.
200
Pharmaceutical Research and Manufacturers of America 117
The Pharmaceutical Research and Manufacturers of America (PhRMA) is
the national association representing the U.S. research-based pharmaceutical
industry.
PhRMA is highly supportive of each of the subject trade agreements and
PhRMA members have reaped enormous benefits from these trade agreements
which have opened up foreign markets to U.S. exports. The industry benefitted
greatly from the improved intellectual property protection, reduced technical
barriers to trade, and “the zero for zero” initiative of the United States that
eliminated duties on many active ingredients and intermediates.
While the U.S. industry has fared well with these treaties, not all trade
agreements were created equal. The most acceptable agreement would be one
that provides intellectual property protection comparable to that found in the
United States, whereas the TRIPS agreement established only a minimum level
of protection for intellectual property protection. More recent multinational and
bilateral agreements have improved the protection for intellectual property
rights that was initiated in the TRIPS agreement and extended and clarified in
the NAFTA. For example, the U.S.-Jordan FTA provided for improved data
protection, allowed biotech products to be patentable, limited compulsory
licensing, and extended the patent period to allow for time lost because of
regulatory delays.
Other elements of the trade agreements have also been quite beneficial. The
WTO Agreement on Technical Barriers to Trade extended the work of the
Tokyo Round. The plurilateral Agreement on Government Procurement limited
the ability of government procurement practices to create artificial barriers to
trade. The Agreement on Government Standards reduced the ability of
countries to use regulations, standards, and testing and certification procedures
as tools to restrict trade. The association supports measures that such as those
embodied in the U.S.-Jordan FTA that protect the pharmaceutical industry from
parallel imports, a practice in which products are sold at a lower price in one
country (usually a poor country) and then resold at a higher price, by a third
party, in another country (usually a richer country).
117 Andrew W. Shoyer, USITC hearing testimony on behalf of the Pharmaceutical
Research and Manufacturers of America, Jan. 14, 2003.
201
Mineral and Metal Products118
Overview
The United States is a major producer and consumer of mineral and metal
products.119 This sector is composed of five subsectors (in decreasing shipment
order for 2001): fabricated metal products except machinery and transportation
equipment (fabricated metal products); primary metals; stone, clay, glass, and
concrete products (structural minerals); nonmetallic minerals, except fuels
(nonmetallic minerals); and metallic ores/concentrates.120 Fabricated metal
products and primary metals together represented roughly 80 percent of total
sector output in terms of value throughout the period. Structural minerals
represented most of the remaining output, with combined shipments of metallic
ores and concentrates and nonmetallic minerals representing only about 5
percent of sector output. Competitive changes during 1978-2001 have been the
result of rapidly expanding foreign production most evident in primary metals
and metallic ores and concentrates subsectors. Therefore, the remainder of this
section focuses on these particular subsectors.
The primary metals and metallic ores/concentrates subsectors are heavily
concentrated as typically a handful of producers account for most production in
118 For the purposes of this investigation, mineral and metal products comprise SIC
groups 10, 14, 32, 33, and 34.
119 Reliable data on world output and the U.S. position relative to other countries for
the diverse collection of products in this sector are not available. Such information is
available for specific products/product groups. In 2001, U.S. raw steel production ranked
third globally; unwrought aluminum, third; refined copper, second; gold, second; glass,
first; and cement, third.
120 In macroeconomic definitions, fabricated metal products, primary metals, and
structural minerals are manufactured products; nonmetallic minerals and metallic
ores/concentrates are mined products. Fabricated metal products include, for example,
steel beams, fasteners, cutlery, hand tools, metal cans, plumbing fixtures, springs, etc.
Primary metals include ferrous (e.g., steel and related steel alloy metals) and nonferrous
(e.g., aluminum, copper, precious metals) metal and metal alloys in unwrought (basic,
unfabricated shapes such as an ingot or cathode) and wrought forms (semifabricated
shapes such as bare wire, sheet, strip, pipe/tube) that are typically used as inputs for the
production of fabricated metal products. Structural minerals include cement, dimensional
stone (such as granite shaped for buildings), and glass windshields. Nonmetallic minerals
include sand, gravel, uncut dimensional stone, etc. which typically are used as inputs for
structural minerals. Metallic ores/concentrates include iron, copper, zinc, and lead
ores/concentrates that are typically used as inputs for primary metal products.
202
each industry or broad industry segment,121 the most notable exception being
the steel industry, which is characterized by a large number of producers.
The level of integration between these industries and industry segments is not
extensive, although it is common for some industries to produce other metals
as byproducts. Primary metal producers are typically integrated with domestic
upstream metallic ore/concentrate operations. Exceptions include certain
metals, such as aluminum, for which the United States lacks natural
resources and imports metallic concentrates to feed the corresponding
domestic primary metal operations. Companies that produce metal/metal
alloys from mined materials are typically separate entities from companies
that produce such products from recycled materials. The notable example is
the steel segment, which is composed of integrated producers that
manufacture steel primarily from iron ore and separate secondary producers
that manufacture steel from scrap. In certain industries, such as copper,
unwrought and wrought producers are typically separate companies. Most
companies in these subsectors have a national orientation, although certain
U.S.-based companies own foreign aluminum, copper, gold, and to a lesser
extent, steel operations. Foreign-based companies own certain U.S. operations
that produce steel, copper, and gold products
U.S. shipments of mineral and metal products fluctuated downward during
1978-2001, by 18 percent to an estimated $470 billion in 2001 (table 5-16).122
The overall decline in the value of shipments was led by a 40 percent decrease
for primary metal products to $145 billion, largely due to reduced prices. In
terms of quantity, there was a small but steady increase in shipments of most
primary metal products, with fluctuations related to general economic
conditions such as an energy crisis and shifts in the dollar exchange rate.
However, prices have generally decreased in both nominal and real terms for
most metals since the 1980s. This is largely a result of surging production in
less developed countries.123
U.S. steel124 shipments declined sharply in value from $148.5 billion to
$70.8 billion, 52 percent, during 1978-2001 while quantities shipped increased
by 1 percent to 109,463 metric tons, but not before dropping by 35 percent to a
low of 67,866 in 1982. Most of the decline occurred during 1978-82, when the
121 Major industries include steel, aluminum, copper, gold, silver, lead, zinc.
Industries are further segmented by type of processing (unwrought versus wrought) and
by type of feed material (mined versus recycled).
122 Annual production totals are overstated as they were derived by summing
production for each subsector, which results in the double counting of input materials.
123 National Research Council, Competitiveness of the U.S. Minerals and Metals
Industry (Washington, D.C.: National Academy Press, 1990), p. 13.
124 Steel is defined here as Standard Industrial Classification (SIC) industry 331,
blast furnace and basic steel products, and SIC 332, iron and steel foundries.
203
204
Table 5-16
Minerals and metals products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption
and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
446.1
48.4
18.7
475.8
-29.7
433.8
52.2
17.8
468.1
-34.3
449.4
47.8
19.9
477.4
-28.0
492.6
54.8
28.5
518.9
-26.3
490.0
52.4
30.3
512.2
-22.2
10.2
4.2
11.1
4.1
10.0
4.4
10.6
5.8
10.2
6.2
2,985
2,239
2,878
2,156
2,854
2,146
2,928
2,217
2,953
2,232
14.04
13.94
13.70
13.61
13.45
199
201
210
222
220
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
571.4
49.5
25.0
596.0
-24.6
602.1
51.6
36.2
617.4
-15.4
552.1
51.9
39.5
564.5
-12.4
533.6
52.0
32.6
552.9
-19.4
428.1
42.4
24.0
446.5
-18.4
450.3
41.8
21.7
470.3
-20.1
461.1
50.8
21.4
490.6
-29.5
Percentage
Imports/apparent
consumption . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . .
8.3
4.4
8.4
6.0
9.2
7.2
9.4
6.1
9.5
5.6
Total employment . . . . . . . . . . . . .
Production workers . . . . . . . . .
3,758
2,915
3,865
2,990
3,601
2,728
3,537
2,666
3,076
2,260
Hourly earnings . . . . . . . . . . . . .
14.51
14.58
14.52
14.68
14.57
8.9
4.8
10.4
4.6
1,000 workers
2,902
2,145
3,044
2,284
Constant (1996) dollars
14.98
14.14
$1,000 per worker
Labor productivity . . . . . . . . . . . . .
See footnote at end of table.
196
201
202
200
189
210
202
Table 5-16—Continued
Minerals and metals products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption
and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
465.3
47.8
33.3
479.8
423.1
44.1
35.5
431.7
426.6
44.7
35.9
435.3
432.6
46.8
40.3
439.1
468.6
56.8
37.7
486.7
498.1
61.7
43.7
516.1
503.6
63.6
45.4
520.8
524.1
68.9
48.2
544.9
531.3
75.7
47.7
559.3
525.6
74.9
46.4
554.2
523.7
86.1
52.3
557.5
470.1
74.1
46.0
498.2
Trade balance . . . . . . . . . . . . . . . .
-14.5
-8.6
-8.8
-6.5
-19.1
-18.0
-18.2
-20.8
-28.0
-28.5
-33.8
-28.1
12.7
9.2
13.5
9.0
13.5
8.8
15.4
10.0
14.9
9.8
2,903
2,224
2,944
2,257
2,944
2,254
2,972
2,280
2,856
2,168
13.35
13.48
13.64
13.78
13.78
236
236
233
230
217
Percentage
Imports/apparent
consumption . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . .
10.0
7.2
10.2
8.4
10.3
8.4
10.7
9.3
11.7
8.1
Total employment . . . . . . . . . . . . .
Production workers . . . . . . . . .
2,900
2,180
2,760
2,014
2,692
2,023
2,690
2,102
2,770
2,172
Hourly earnings . . . . . . . . . . . . .
13.33
13.27
13.23
13.21
13.23
12.0
8.8
12.2
9.0
1,000 workers
2,845
2,172
2,863
2,188
Constant (1996) dollars
13.20
13.33
$1,000 per worker
Labor productivity . . . . . . . . . . . . .
214
206
212
214
223
230
230
1
Includes SIC 10 (metal mining), 14 (mining and quarrying of nonmetallic minerals, except fuels), 32 (stone, clay, glass, and concrete products), 33 (primary metal
industries), and 34 (fabricated metal products, except machinery and computer equipment).
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics.
205
value of shipments fell by almost 43 percent to $85.1 billion. During
1982-86, U.S. steel producers, primarily integrated producers of flat-rolled
steel, reportedly lost $12 billion and approximately 25 companies filed for
bankruptcy.125 U.S. steel consumption during this period stagnated, imports
rose, prices declined, and U.S. capacity utilization was low. Also, in the early
1980s, the appreciating value of the U.S. dollar further enhanced the
competitiveness of foreign steel producers. From 1982 through 2001, the
value of U.S. steel sector shipments declined by another 17 percent while the
quantity shipped increased by 61 percent.
Despite producing higher quantities of primary metal products, the U.S.
share of world metals production declined during 1978-2001.126 U.S. primary
metal operations have had to compete with lower cost foreign operations,
especially those in less developed countries that typically have higher quality
natural resources, lower labor costs, more favorable mining investment
requirements,127 and in many cases lower environmental compliance costs.128
In some cases, U.S. producers began importing certain products they previously
produced domestically. For example, beginning in the early 1990s, the U.S.
steel industry produced a significant portion of steel mill products from
imported semifinished steel129 to take advantage of lower-cost steel production
capabilities in other countries, including Australia, Brazil, Mexico, and Russia.
Semifinished steel imports were used in about 6 percent of U.S. steel
production in 2001.
During 1978-2001, apparent consumption of mineral and metal products
fluctuated downward by 16 percent to $498.2 billion, reflecting general
economic trends and price reductions for most primary metals and related
products. Contrasting the overall decline in the value of U.S. shipments of the
sector, U.S. imports of mineral and metal products increased by 50 percent to
$74.1 billion during 1978-2001. Imports of fabricated metal products led the
growth, increasing by 204 percent to $23 billion in 2001.
125
Thomas R. Howell, William A. Noellert, Jesse G. Kreier, and Alan William
Wolff, Steel and the State: Government Intervention and Steel’s Structural Crisis,
(Boulder, CO: Westview Press 1988), pp. 501 and 503.
126 National Research Council, Competitiveness of the U.S. Minerals and Metals
Industry, p. 2.
127 Many developing countries have reformed their mining laws to make them more
favorable to foreign mining investments by loosening exploration regulations, reducing
corporate tax rates, and streamlining permit processing. See U.S. Department of
Commerce, “Metals and Industrial Minerals Mining,” U.S. Industry and Trade Outlook
1998 (New York City: McGraw--Hill Trade, Nov. 1997), p. 1--1.
128 Although environmental regulations are more common worldwide, developing
countries tend to have insufficient resources for strict government enforcement of these
regulations. Ibid.
129 Solid forms that must be further processed by steel mills before sale to
consuming industries.
206
In conjunction with decreasing shipments and increasing imports, sector
employment dropped by 902,000 (24 percent) during 1978-2001 (table 5-16).
Employment in the steel industry declined from 561,000 employees in 1978 to
224,000 in 2000 (latest year available), a decrease of 60 percent. At the same
time, steel and nonferrous metals industries made large investments in
labor-saving technologies that increased overall labor productivity by
11 percent.130 Hourly earnings for the overall sector decreased by 5 percent
following mine and plant consolidations and wage concessions.131
The U.S. competitive position for primary metals and metallic
ores/concentrates started to deteriorate significantly during the late 1970s/early
1980s as foreign production, especially in less developed countries, began to
grow quickly.132 Ownership, investment, and tax incentives133 as well as the
prospect of utilizing low-cost labor and rich natural resources has attracted
investment and spurred the development of metal industries in these countries.
Foreign production of steel in developing countries increased significantly,
even in countries with limited steel-making raw materials. This occurred
mostly as a result of government policies that stimulated the creation of a
domestic steel industry because it was considered an essential component of
development. Increased production contributed to real price declines for most
metals and metal products, which were further exacerbated by overproduction
by the less developed countries to counter price decreases.134
During the same period, U.S. Government regulations concerning metal
production may have added to the competitive disadvantages faced by U.S.
operations. According to industry sources, increasingly strict environmental
regulations with regard to emissions and remediation of discontinued
operations added significant costs to U.S. operations.135 In addition,
development of new mining operations has been hindered by attempts during
130 The steel industry’s cost reduction efforts maintained constant--dollar
productivity despite a decline in real steel prices. Productivity per worker in 2001 was
almost unchanged from that in 1987, at about $218,000 per employee.
131 National Research Council, Competitiveness of the U.S. Minerals and Metals
Industry, p. 19.
132 For example, Chile’s copper mine production (in terms of the amount of copper
in the mined material) increased from less than 1.3 million metric tons in the early 1980s
to over 4.7 million metric tons in 2001.
133 “Metals and Industrial Minerals Mining,” U.S. Industry and Trade Outlook 1998,
p. 1--1.
134 Competitiveness of the U.S. Minerals and Metals Industry, pp. 12--13.
135 As a frame of reference, the estimated cost of complying with federal
environmental regulations was 10 percent of the price of each metal in 1990
(Competitiveness of the U.S. Minerals and Metals Industry, p. 14). Remediation for one
discontinued U.S. mine site reportedly cost $65 million. See Alistair MacDonald,
Talmac Consulting, Industry in Transition: A Profile of the North American Mining
Sector (Winnipeg, Canada: International Institute for Sustainable Development, 2002),
p. 94.
207
the last decade to revise the 1872 Mining Law, which governs access to
public lands for metallic ore/concentrate operations. Although the Law has
not been changed,136 uncertainty regarding possible revisions in ownership
and royalty provisions have likely discouraged the development of U.S.
mining operations.137 Exploration activity for untapped metal ore deposits
has declined steadily, and few new operations have been instituted since the
mid-1990s.
Further, U.S. labor costs for metals production were among the highest in
the world and a strong dollar during the period gave imported products a
competitive advantage by lowering the relative price of foreign-produced
metals in the U.S. market.138 In particular, the strong-dollar policies of the
early 1980s resulted in a surge of steel imports.139 Beginning in 1985, as
highlighted by the Plaza Agreement of September 1985,140 the U.S. dollar was
managed at a more competitive level and steel imports eased, although the
dollar continued to strengthen during the 1990s. Other costs, especially legacy
costs associated with employee pension and medical insurance liabilities for the
U.S. steel industry, have also contributed to high labor costs.141
136
The Mining Law of 1872, which deals with land tenure, has not been changed,
however, U.S. federal government administrations have implemented and revised
regulatory actions to administer mining activities of public lands. See Industry in
Transition: A Profile of the North American Mining Sector, p. 71 and Marc Humphries
and Carol Hardy Vincent, Congressional Research Service, “IB89130: Mining on
Federal Lands,” found at
http://www.NCSEonline,org/NLE/CRSr...cfm?&CFID=8027258&CFTOKEN=66301521,
retrieved May 28, 2003, pp. 1--2.
137 New cost increases to the U.S. mining industry without offsetting cost reductions
in other areas may make U.S. deposits uneconomical compared with those in nations that
are rewriting their mining laws to attract mining investment, particularly developing
countries. See Humphries and Vincent, “IB89130: Mining on Federal Lands,” p. 5. and
“Metals and Industrial Minerals Mining,” U.S. Industry and Trade Outlook 1998, p. 1--1.
138 Competitiveness of the U.S. Minerals and Metals Industry, pp. 14--15.
139 USITC, U.S. Global Competitiveness: Steel Sheet and Strip Industry (inv. No.
332--231), USITC Pub. 2050, Jan. 1988, pp. 11--127.
140 The Plaza Agreement of September 1985 was an effort to coordinate policy in
the major industrialized economies—France, Germany, Japan, United Kingdom, and the
United States—that included manipulating foreign exchange markets. See Geoffrey P.
Miller, “The Role of a Central Bank in a Bubble Economy,” found at
http://www.gold-- eagle.com/editorials/cscb002.html, retrieved Nov. 5, 2002.
141 USITC, Information obtained in the Investigation (Carbon and Alloy Steel Flat,
Long, and Tubular Products), vol. 2 of Steel (inv. No. TA--201--73), USITC Pub. 3479,
Dec. 2001, pp. Overview--31 to Overview--35.
208
To encourage more efficient operating conditions, the U.S. metals industry
reduced production capacity by closing high-cost plants and rationalizing
operations (including consolidation of producers in many metal industries);
disposed of non-core interests and focused assets on metal production to
achieve cost reductions through economies of scale; reduced management
requirements; and increased financial resources for new, more efficient
technologies. Certain metal industries further specialized production by
separating types of operations such as unwrought and wrought to focus
expertise on each phase of production. Labor cost reductions were achieved
through layoffs, wage reductions, and by broadening the scope of many union
jobs to increase personnel flexibility.142
To further improve production efficiency, U.S. producers have aggressively
adopted new technologies in the production of metallic ores and primary
metals. Automated computer-based control systems have been integrated into
the production system for better quality control. There have been several
advances in the production process to improve efficiencies (reduce energy
requirements, increase productivity) and lower environmental effects. Copper
and gold producers greatly expanded their use of leaching143 techniques, which
provided a cost effective means of extracting desired metals from low-grade
ores. Leaching was developed prior to 1980 but put into extensive commercial
use during 1980-2001.
The U.S. steel industry has adopted key cost-saving technologies, including
basic-oxygen and electric furnace steelmaking, which replaced the energy
intensive open hearth process, and continuous casting of semifinished forms,
which offered significant labor, capital, and energy savings.144 The adoption of
these technologies by the U.S. industry started before 1978145 and was
essentially completed in 1991.146 Minimill production of flat-rolled steel
products, using thin-slab casting, was also commercialized during this
period.147 This technology reduces economies of scale for flat-rolled steel
production and significantly reduces the capital investment required per unit of
output.
During 1978-2001, U.S. imports of sector products were subjected to
numerous antidumping and countervailing duty orders issued for primary
metals, including steel products, brass sheet/strip, unwrought magnesium, and
tungsten ore concentrates. In addition, the United States implemented a number
of actions during the period in response to petitions by steel companies seeking
relief from the effects of imports under antidumping, countervailing duty, or
142
Competitiveness of the U.S. Minerals and Metals Industry, p. 19.
Leaching is the extraction of desired metal from ore by selectively dissolving it
in a suitable, usually chemical, solution.
144 USITC, Steel, vol. 2, p. Overview--20.
145 Basic--oxygen steelmaking and continuous casting were also being installed in
new steelmaking facilities in developing countries and elsewhere prior to the 1980s.
146 USITC, Steel, vol. 2, p. Overview--20.
147 Ibid.
143
209
safeguard statutes. Specific programs included specialty steel quotas
(1976-80),148 a trigger price mechanism (“TPM”) (1978-82),149 U.S.-E.C.
steel voluntary restraint agreements (“VRA”) (1982-84),150 specialty steel
measures (1983-84),151 and the extended VRA program (1984-92).152 A
review of each program and its impact on the steel industry follows at the
end of this overview.
Global competitive conditions have spurred consolidation among producers
and the closure of high-cost operations in the United States and other
industrialized nations. Many of these producers have invested in metal
production in developing countries with large resources of metal ores as well as
lower labor and energy costs. Host countries for these off-shore operations
combine lower-cost operating advantages with advanced technology to produce
steel at highly competitive prices.
Effect of Trade Agreements on the Sector
The five trade agreements subject to this investigation had little impact on
the U.S. mineral and metal products sector relative to other factors such as the
competitive problems discussed above, decreased real metal prices, increased
production sharing, and increased U.S. consumption of imported products that
had no tariffs during 1980-2001. Macroeconomic factors also contributed
significantly to sector trade including exchange rate fluctuations, general
economic fluctuations, and the economic crises in Mexico (1995) and Asia
148 In June 1976 the President imposed quotas on imports of stainless steel and tool
steel products on a regional or, in the case of the larger suppliers, a country--by--country
basis. USITC, U.S. Global Competitiveness: Steel Sheet and Strip Industry (inv. No.
332--231), USITC Pub. 2050, Jan. 1988, p. 11--120.
149 In exchange for the agreement of U.S. steel companies to withdraw a number of
antidumping petitions against Japanese and EU steel exporters, the Administration
implemented the TPM, a system based on reference prices. Ibid., p. 11--123.
150 The Voluntary Restraint Agreement limited EC exports of steel mill products
accounting for about 64 percent of EC exports in 1982 to fixed percentages of the U.S.
market for the products. In return, the U.S. steel companies withdrew antidumping
complaints against the European producers. Ibid., p. 11--127.
151 The specialty steel measures were a four--year program of import relief
consisting of increased duties on stainless steel sheet, strip and plate, and quotas on
stainless steel bar and wire and certain tool steel products. Ibid., p. 11--29.
152 The extended VRAs with the EC (also known as the nine--point U.S.
Government policy for the steel industry), and eventually 16 other countries, limited U.S.
imports of various steel mill products. Ibid., p. 11--130 and USITC, Steel Industry
Annual Report On Competitive Conditions in the Steel Industry and Industry Efforts to
Adjust and Modernize (inv. No. 332--289), USITC Pub. 2436, Sept. 1991, p. 1--1.
210
(1998).153 The relevance of each trade agreement’s impact on this industry
sector is discussed below.
Tokyo Round
The Tokyo Round likely had a minimal effect on sector trade. The average
U.S. tariffs on sector imports were relatively low before the agreement (table
5-17) as they were for major foreign markets, including Japan and the
European Community.154 Although reduced U.S. tariff rates facilitated import
growth, the change in trade was also a result of the deteriorating competitive
position of U.S. industries, declining real metal prices during the 1980s, and
the appreciation of the U.S. dollar. These developments are revealed in the
steady decline of exports during the early 1980s compared with relatively
stable imports and consumption (table 5-16).
From 1980 (the year of the first stage of Tokyo Round tariff reductions) to
2000, U.S. total trade (imports plus exports) in sector products increased at an
average annual rate of 2.1 percent to $138 billion although significant
year-to-year fluctuations occurred, then dropped by 13 percent in 2001. This
sector trend generally matched trends in the U.S. economy as a whole, with
downturns occurring during the early 1980s, 1990s, and the year 2000. U.S.
exports of sector goods increased by 16 percent to $46 billion during
1980-2001 while imports increased by 43 percent to $74 billion, causing the
trade deficit to more than double (table 5-16). International trade became an
increasingly important factor for this sector as the ratio of exports to shipments
increased by about 3 percentage points to 9.8 percent during 1980-2001 and
imports to apparent consumption increased by 6 percentage points to 15
percent.
U.S.-Israel FTA
The U.S.-Israel FTA (FTA) had a moderate effect on sector trade with
Israel, particularly for U.S. exports, but an insignificant effect on total sector
153
These crises contributed to lower world consumption and lower or stagnating
metal prices. Consumption of sector products strongly correlates to performance of a
country’s economy, especially building construction, automobile, and machinery
production.
154 However, there was a relatively large disparity between U.S. and Canadian tariffs
on each others products before and after the Tokyo Agreement. Before the Agreement,
Canada’s average base rate on U.S. sector products was 10 percent versus the U.S.
comparable rate of 3 percent on Canadian products. After the agreement, Canadian
concession rates on U.S. products averaged 6 percent compared with U.S. concession
rates of 2 percent on Canadian products. See “Twenty--Fourth Annual Report of the
President of the United States on the Trade Agreements Program: 1979,” ch. in The
Trade Agreements Program of the United States: Annual Reports of the President,
1957--1985, compiled by Bernard D. Reams Jr., vol. 3, (Buffalo, NY: William S. Hein &
Company, Inc., 1989) p. 54--58.
211
212
Table 5-17
Minerals and metals products: Trade issues addressed in trade agreements and U.S. tariffs
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1979) 3.6%
(1987) 3.1%
(1984) 0.4%
(1995) 0.1%
(1987) 1.5%
(1998) <0.1%
(1994) 3.0%
(1999) 1.7%
(1993) 1.0%
(2001) 0.2%
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
Import licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Trade issues and U.S. tariffs
Customs valuation . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Government procurement . . . . . . . . . . . . . . . . . . . .
X
X
X
Offsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Rules of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
TRIMs3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRIPs4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
1
2
The NAFTA provides that tariffs will be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2008 for all other goods.
Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the world
during the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates in
parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
3 Trade-related investment measures.
4 Trade-related aspects of intellectual property rights.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative,
Trade Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
trade and the industry because Israel only accounted for about 1 percent of
exports and less than 0.5 percent of imports for U.S. mineral and metal
products during 1985-2001 (table 5-18). The U.S.-Israel FTA eliminated the
industrial product preferential trade agreement with the European Community
(EC) that created severe tariff disparity on U.S. products compared with
those from Europe.155 In contrast to U.S. exports, the agreement is not likely
to have had as significant an effect on U.S. imports from Israel because the
average U.S. tariffs on sector imports were already less than one-half percent
(table 5-17).
During 1985-2001, U.S. total trade with Israel in mineral and metal
products increased at an average annual rate of 3 percent, to about $646
million, compared with a 3.7 percent rate for all countries (table 5-18). U.S.
exports of sector products to Israel more than doubled to $407 million while
U.S. imports from Israel increased by 9 percent to about $239 million. U.S.
exports to and imports from Israel increased for all five subsectors comprising
mineral and metal products during 1989 (earliest year specific product data
available) through 2001. Arms and ammunition were the fastest growing
exports and imports, which accounted for a range of 20-43 percent of total
sector trade with Israel.156 However, the agreement did not apply to arms and
ammunition, goods for which both countries already exempted from tariffs if
they were imported with the Governments’ authorization for military
purposes.157 In contrast, total trade in steel fell slightly from $25.5 million in
1989 to $24.7 million in 2001, but ranged from a low of $16.6 million to a
high of $34.1 million during this period.
U.S.-Canada FTA
The U.S.-Canada FTA had a minimal effect on sector trade. Instead,
production sharing was probably the more important reason for trade growth.
The Agreement also likely contributed to an increase in integration between
U.S. and Canadian industries which may have further contribute to increased
trade between the countries. Prior to the implementation of this treaty, Canada
did have a British preferential tariff (BPT) that placed U.S. products at a
155 U.S. Trade Representative (USTR), “U.S.--Israel Free Trade Agreement,” Annual
Report of the President of the United States on the Trade Agreements Program
1984--1985, issue 28, Feb. 1986, p. 97.
156 U.S. exports of arms and ammunition to Israel fluctuated upward for a
238--percent increase to $194 million in 2001, with ranges from a low of almost $39
million in 1994 and a high of $244 million in 1998. During the same time frame, U.S.
imports from Israel fluctuated upward for a 204--percent increase to $59 million, with
ranges from a low of almost $10 million in 1997 to the high of $59 million in 2001.
157 See Bulletin International Des Douanes (Israel 1975--1976), 8th ed., No. 41
(Brussels: International Customs Tariffs Bureau, 1975), p. 181 and United States
International Trade Commission, Tariff Schedules of the United States Annotated 1980,
sch. 8, part 3, item 832.00, p. 753.
213
214
Table 5-18
Minerals and metals products: U.S. trade with Israel, 1984-2001
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
206.6
54,587.5
146.4
52,267.9
119.4
47,716.6
109.2
43,977.8
133.4
44,531.8
54,794.1
52,414.2
47,836.0
44,087.0
44,665.2
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
189.8
50,630.7
217.9
48,169.1
218.3
51,926.7
202.0
47,619.2
Total . . . . . . . . . . . . . .
50,820.6
48,387.0
52,145.1
47,821.1
Percent
Israel/Total . . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
0.4
0.5
0.4
0.4
0.4
0.3
0.3
0.3
0.3
—
—
14.8
-4.9
0.2
7.8
-7.5
-8.3
2.3
14.6
-29.2
-4.3
-18.4
-8.7
-8.5
-7.8
22.2
1.3
Total . . . . . . . . . . . . . .
—
-4.8
7.8
-8.3
14.6
-4.3
-8.7
-7.8
1.3
125.7
28,347.4
222.2
30,028.5
274.0
33,044.3
347.1
35,112.7
247.9
35,667.5
28,473.1
30,250.7
33,318.3
35,459.7
35,915.4
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
161.6
21,183.7
183.7
18,489.6
136.2
17,694.3
109.4
19,759.9
Total . . . . . . . . . . . . . .
21,345.3
18,673.3
17,830.5
19,869.3
Percent
Israel/Total . . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
0.8
1.0
0.8
0.6
0.4
0.7
0.8
1.0
0.7
—
—
13.7
-12.7
-25.9
-43.0
-19.7
11.7
14.9
43.5
76.7
5.9
23.3
10.0
26.7
6.3
-28.6
1.6
Total . . . . . . . . . . . . . .
—
-12.5
-4.5
11.4
43.3
6.2
10.1
6.4
1.3
See note at end of table.
Table 5-18—Continued
Minerals and metals products: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
152.3
68,750.3
171.2
75,496.8
214.4
74,727.8
267.2
85,793.8
238.5
73,885.1
68,902.6
75,668.1
74,942.1
86,061.1
74,123.7
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
156.5
46,648.3
165.3
56,584.0
155.3
61,554.7
125.2
63,480.0
Total . . . . . . . . . . . . .
46,804.7
56,750.0
61,710.0
63,605.2
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.3
0.3
0.3
0.2
0.2
0.2
0.3
0.3
0.3
17.3
4.8
5.7
21.3
-6.1
8.8
-19.4
3.1
21.7
8.3
12.4
9.8
25.2
-1.0
24.7
14.8
-10.7
-13.9
Total . . . . . . . . . . . . .
4.8
21.3
8.7
3.1
8.3
9.8
-1.0
14.8
-13.9
448.4
47,700.2
485.8
47,177.0
353.3
46,047.0
356.2
51,890.6
407.4
45,632.5
48,148.6
47,662.8
46,400.3
52,246.9
46,039.9
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
259.1
40,055.0
232.1
37,424.8
286.2
43,401.1
501.1
44,880.1
Total . . . . . . . . . . . . .
40,314.1
37,656.9
43,687.3
45,381.2
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.6
0.6
0.7
1.1
0.9
1.0
0.8
0.7
0.9
4.5
12.3
-10.4
-6.6
23.3
16.0
75.1
3.4
-10.5
6.3
8.4
-1.1
-27.3
-2.4
0.8
12.7
14.4
-12.1
Total . . . . . . . . . . . . .
12.3
-6.6
16.0
3.9
6.1
-1.0
-2.7
12.6
-11.9
215
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
disadvantage compared with those imported from the United Kingdom.158
The U.S.-Canada FTA would have eliminated the disparity by January 1998
with the bilateral tariff phase-out between the two countries.159 Average U.S.
tariffs on sector imports were relatively low at 1.5 percent before the
agreement (table 5-19); following the Tokyo Round, Canadian tariffs on
sector imports ranged from 2.0 to 10 percent ad valorem.160
During 1988-2001, U.S. total trade with Canada in mineral and metal
products grew at an average annual rate of 2.9 percent, to $31 billion (table
5-19). Canada has been the single largest U.S. trading partner in this sector
since 1987, just prior to the agreement taking affect, accounting for 25 to
28 percent of U.S. total sector trade. U.S. exports of sector products to Canada
increased by 80 percent to almost $14.6 billion, most of which was accounted
for by iron and steel and fabricated articles of iron or steel followed by
valves161 (used primarily to control the flow of liquids, gases, and solids
through piping systems).162 U.S. exports to Canada of iron and steel and
fabricated products of iron or steel each doubled in 1990 from the previous
year to $1.1 billion and $1.6 billion, respectively.163 Despite fluctuations,
neither product group dropped below the 1990 export value, and iron and steel
exports doubled to $2 billion while fabricated products of iron or steel rose to
158 See Bulletin International Des Douanes (Canada 1985--1986), 17th ed., No. 57
(Brussels: International Customs Tariffs Bureau, 1975).
159 USTR, 2001 National Trade Estimate Report on Foreign Trade Barriers
(Washington: GPO, 2001), p. 30.
160 “Twenty--Fourth Annual Report of the President of the United States on the
Trade Agreements Program: 1979,” The Trade Agreements Program of the United
States: Annual Reports of the President, 1957--1985, pp. 54--55.
161 The United States has long been the world’s largest single producer of valves and
similar devices, and Canada has been a major export market since before the trade
agreement, accounting for approximately one--fourth of U.S. valve exports in 1983. See
USITC, Summary of Trade and Tariff Information: Taps, Cocks, Valves, and Similar
Devices and Parts, USITC Pub. 841, Oct. 1984, pp. 14--19.
162 Markets for these products cover a broad spectrum of industries including
shipbuilding and repair, petroleum refining, petrochemicals, pulp and paper, water and
sewage treatment facilities, processed food and beverages, and power generation.
163 Although Canada is reported to be the world’s largest exporter of minerals and
metals, it accounts for less than 1 percent of the world’s pig iron and raw steel
production, relying on imports to supplement its requirements. For production data, see
U.S. Department of the Interior, U.S. Geological Survey, The Mineral Industry of
Canada (2001), by Alfredo C. Gurmendi, Table 1: Production of mineral commodities,
found at http://minerals.usgs.gov/minerals/pubs/country/2001/camyb01.pdf, retrieved
Mar. 14, 2003 and U.S. Department of the Interior, U.S. Geological Survey, Mineral
Commodity
Summaries:
Iron
and
Steel
2001,
p.
2,
found
at
http://minerals.usgs.gov/minerals/pubs/commodity/iron_&_steel/350302.pdf,
retrieved
Mar. 14, 2003.
216
Table 5-19
Minerals and metals products: U.S. trade with Canada and Mexico, 1987-2001
Year
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1987
1988
1989
1990
1991
Millions of constant (1996) dollars
1992
1993
1994
11,586.4
2,461.5
33,773.3
47,821.1
13,253.0
2,840.9
38,700.2
54,794.1
13,341.1
3,371.1
35,702.1
52,414.2
10,975.0
3,199.1
33,661.9
47,836.0
10,818.4
2,713.8
30,554.8
44,087.0
11,280.4
2,743.3
30,641.6
44,665.2
12,128.1
2,999.6
31,677.1
46,804.7
13,960.2
3,704.5
39,085.5
56,750.2
24.2
5.2
24.2
5.2
25.5
6.4
22.9
6.7
24.5
6.2
25.3
6.1
25.9
6.4
24.6
6.5
—
—
—
—
14.4
15.4
-52.6
-42.7
0.7
18.7
-7.8
-4.3
-17.7
-5.1
(1)
-8.7
-1.4
-15.2
-9.2
-7.8
4.3
1.1
0.3
1.3
7.5
9.3
3.4
4.8
15.1
23.5
23.4
21.3
9,985.8
4,093.8
21,380.2
35,459.7
10,274.2
4,775.0
20,866.2
35,915.4
11,018.9
4,460.2
24,835.0
40,314.1
10,604.1
5,407.9
21,644.9
37,656.9
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,214.5
1,622.9
11,031.9
19,869.3
8,070.7
2,279.4
18,123.1
28,473.1
7,604.5
3,004.3
19,641.9
30,250.7
10,593.3
3,347.7
19,377.3
33,318.3
36.3
8.2
28.3
8.0
25.1
9.9
31.8
10.1
28.2
11.6
28.6
13.3
27.3
11.1
28.2
14.4
—
—
—
—
11.9
40.5
64.3
43.3
-5.8
31.8
8.4
6.2
39.3
11.4
-1.4
10.1
-5.7
22.3
10.3
6.4
2.9
16.6
-2.4
1.3
7.3
-6.6
19.0
12.3
-3.8
21.3
-12.8
-6.6
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
217
See footnote at end of table.
218
Table 5-19—Continued
Minerals and metals products: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
17,095.6
7,212.9
51,359.5
17,346.4
7,588.7
50,007.0
19,094.2
8,506.0
58,460.9
16,348.7
7,791.4
49,983.6
75,668.1
74,942.1
86,061.1
74,123.7
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,736.4
4,785.7
41,187.9
16,423.5
5,544.2
41,637.5
17,077.6
6,366.0
45,459.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,710.0
63,605.2
68,902.6
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25.5
7.8
25.8
8.7
24.8
9.2
22.6
9.5
23.2
10.1
22.2
9.9
22.1
10.5
12.7
29.2
5.4
4.4
15.9
1.1
4.0
14.8
9.2
0.1
13.3
13.0
1.5
5.2
-2.6
10.1
12.1
16.9
-14.4
-8.4
-14.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.7
3.1
8.3
9.8
-1.0
14.8
-13.9
15,197.1
7,331.4
25,134.3
15,743.9
7,881.7
22,774.8
17,364.5
9,658.3
25,224.1
14,559.9
8,147.8
23,332.2
47,662.8
46,400.3
52,246.9
46,039.9
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,612.5
4,866.4
27,208.3
11,864.3
6,131.3
27,385.7
13,611.5
6,522.9
28,014.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43,687.3
45,381.2
48,148.6
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
26.7
11.1
26.1
13.5
28.3
13.6
31.9
15.4
33.9
17.0
33.2
18.5
31.6
17.7
9.5
-10.0
25.7
16.0
2.2
26.0
0.7
3.9
14.7
6.4
2.3
6.1
11.7
12.4
-10.3
-1.0
3.6
7.5
-9.4
-2.7
10.3
22.5
10.8
12.6
-16.2
-1,568.0
-7.5
-11.9
Less than 0.5 percent.
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
almost $4 billion in 2001. At the same time, U.S. imports from Canada
increased by 23 percent to $16.3 billion, of which aluminum and fabricated
articles of iron and steel accounted for most of the growth.164
NAFTA
The NAFTA likely had a minimal effect on sector trade. However, other
factors like production sharing, the Maquiladora Program,165 and the peso
devaluation of 1996 were probably more important reasons for trade growth.
Although NAFTA resulted in the phase-out of Mexico’s relatively high
10-15 percent ad valorem tariff rates for most sector products, Mexico is a
relatively small consumer for most sector products. By comparison, the average
U.S. tariffs on sector products were relatively low at 1 percent ad valorem
before the agreement. The foreign investment protection and government
procurement elements of this agreement likely have affected U.S. sector
exports. Opportunities increased for U.S. firms to sell tubular oil goods to the
government-owned Mexican petroleum industry and for U.S. steel distributors
to invest in Mexico.
During 1994-2001, U.S. total trade in sector products with NAFTA partners
Mexico and Canada combined grew at an average annual rate of 4.8 percent, to
almost $47 billion, compared with a rate of 3.5 percent for sector trade with all
countries.166 In 1994, Mexico displaced Japan as the second largest U.S. trade
partner for this sector. Since then, Mexico and Canada together have accounted
for 35-40 percent of U.S. total trade. U.S. exports of sector products to Mexico
and Canada increased by 42 percent to about $23 billion,167 of which
164 Mineral and Metal Products showing the largest trade growth, aluminum and
iron and steel, have been major components of U.S./Canada production sharing
operations since before implementation of this agreement. See USITC, Imports Under
Items 806.30 and 807.00 of the Tariff Schedules of the United States, 1982--1985, (inv.
No. 332--237), USITC Pub. 1920, Dec. 1986, pp. 3--2 to 3--4, 4--10, and F--2 to F--3.
165 An increasing share of imports from production--sharing operations enter the
United States under duty--free provisions of NAFTA rather than under the
production--sharing provisions of the U.S. Harmonized Tariff Schedule, Chapter 98,
particularly with the elimination of the customs merchandise processing fee on July 1,
1999. See USITC, “Note,” Production Sharing: Use of U.S. Components and Materials
in Foreign Assembly Operations, 1994-- 1997 (U.S. Imports Under the
Production-- Sharing Provisions of Harmonized Tariff Schedule Chapter 98), (inv No.
332--237), USITC Pub. 3146, Dec. 1998.
166 U.S. total trade with Mexico alone expanded at an average annual rate of 8.6
percent to $16.4 billion while that with Canada expanded by 3.4 percent to $31.9 billion.
167 During 1994--2001, exports to Mexico increased by 57 percent to $8.6 billion
and that to Canada increased by 38 percent to $15.5 billion.
219
fabricated iron or steel metal products accounted for most of the growth to
Canada. The leading exports to Mexico were insulated electric conductors
along with iron and steel and fabricated articles of iron or steel. U.S. imports
from both countries increased by 37 percent, to $24 billion.168 The growth of
imports from Mexico tended to span a wide variety of mineral and metal
products led by insulated electric conductors, valves, and fabricated articles
of iron or steel.169 As with the U.S.-Canada FTA, aluminum and fabricated
articles of iron or steel accounted for most of the import growth from
Canada.
Uruguay Round
The Uruguay Round Agreement likely had a minimal effect on sector trade.
The movement of U.S. manufacturing to developing countries with more
competitive production costs as discussed in the overview, and the bilateral
agreements between the United States, Canada, and Mexico most likely had the
greatest impact on trade through 2001.170 Nontariff barriers that continue to be
a significant impediment to the steel industry are trade-distorting subsidies,
which are being addressed in, among other places, the Organization for
Economic Co-Operation and Development (OECD).171
During 1995-2001, U.S. total trade in mineral and metal products grew at
an average annual rate of 2.2 percent to $120 billion. U.S. exports increased by
5 percent to $46 billion in 2001 and imports increased by 20 percent to $74
billion (table 5-16). A wide range of sector products comprised this growth, of
which fabricated articles of iron and steel led the rise in exports.
Platinum-group metals (PGM) and fabricated iron or steel products were the
overwhelming product leaders in import growth, each recording an increase of
just over $3 billion. However, unlike most fabricated iron or steel products,
PGMs entered the United States duty-free before the enactment of this
agreement.172 Globalization and growing competition in developing countries
168
During 1994--2001, imports from Mexico increased by 110 percent to $7.8
billion and imports from Canada increased by 17 percent to $16.3 billion.
169 Mineral and Metal Products showing the largest trade growth, insulated electric
conductors and valves, are major products of U.S./Mexico production sharing operations.
See Production Sharing: Use of U.S. Components and Materials in Foreign Assembly
Operations, 1994--1997, pp. 3--39 to 3--53.
170 Canada and Mexico have been the dominant U.S. trading partners during the
period.
171 OECD, OECD High Level Meeting on Steel: Progress Made on Cutting
Subsidies, Overcapacity, Dec. 19, 2002, found at
http://www.oecd.org/oecd/pages/document/print_template/0,3371,EN--document-- 39-- non
director..., retrieved Mar. 7, 2003.
172 The increase in PGM imports was due primarily to the sustained demand of the
automotive and electronic industries for the product’s unique catalytic and electrical
properties. Having only one PGM mining operation, the United States is almost totally
dependent on import sources, primarily from South Africa and Russia.
220
led to some shifting among top U.S. trading partners for this sector. Although
Canada and Japan dominated U.S. trade before enactment of this Uruguay
Round Agreement, Japan’s relative importance was overshadowed by Mexico
in 1994 and again by China in 2001. Together, these four countries–Canada,
Mexico, China, and Japan–173 accounted for 52 percent of sector total trade
in 2001, a 4 percentage point increase since 1995.
Views of Interested Parties
American Restaurant China Council 174
The American Restaurant China Council (ARCC) is a trade association that
represents a substantial majority of U.S. Commercial Chinaware production.175
The ARCC member companies are Buffalo China, Inc., The Hall China
Company, and The Homer-Laughlin China Company.
Tokyo and Uruguay Rounds
The Tokyo and Uruguay Round tariff reductions led to large surges of
low-priced imports that eroded U.S. market share for commercial chinaware.
Following the Tokyo Round tariff reduction on commercial chinaware from
48-percent to 35-percent, product imports increased more than eightfold to
nearly five million dozens during 1979-1994. These imports captured a
substantial share of the U.S. market, resulting in either the transfer or shut
down of a number of U.S. manufacturers operations and the loss of hundreds
of American jobs. Imports continued to increase during the Uruguay Round
tariff reduction staging to over 6.8 million dozens by year end 2000, dropping
to 5.8 million dozens in 2001 due to the U.S. economic slowdown. This flow
of U.S. imports is not offset by significant U.S. export opportunities due
largely to high tariff rates overseas, onerous testing and certification
requirements, and national preferences to buy domestic production, particularly
in Europe.
The U.S. Government has historically recognized that commercial
chinaware is an import sensitive product by limiting the industry’s tariff
reduction requirements during the Tokyo Round and by granting a 10-year
173
Listed in decreasing order of value of total trade with the United States in 2001.
Susan Esserman and Melanie Schneck, Steptoe & Johnson, LLP on behalf of the
American Restaurant China Council, written submission to the Commission, February
14, 2003.
175 Commercial chinaware (HTS 6911.10.10 and HTS 6912.00.20) is “especially
designed for use by hotels, restaurants, and other commercial establishments and
institutions that require stronger, thicker, more durable and more sanitary chinaware.”
174
221
staged reduction in the Uruguay Round.176 During this time, the industry
made significant capital improvement investments to lower production costs
and increase efficiency in an effort to ensure its future competitiveness.
However, the commercial chinaware market remains intensely price sensitive
and any future tariff elimination or accelerated tariff reduction would threaten
the U.S. industry’s survival. ARCC also states that maintaining import tariffs
for commercial chinaware would have no discernible effect on consumers
(restaurants and hotels) because it is generally recognized that the cost of
chinaware represents an insignificant part of their (the consumers’) operating
costs.
Nucor Corporation and TXI Chaparral Steel 177
Nucor Corporation (Nucor) and TXI Chaparral Steel (Chaparral) are two of
the largest steel producers in the United States. Nucor produces a variety of
flat-rolled and long products and Chaparral produces only long products,
including beams, hot-rolled bar, and rebar.
NAFTA and the URA have provided foreign exporters and investors
greater access to the U.S. market, but reciprocating benefits for U.S. exporters
and investors have not reached full potential. Nucor and Chaparral contend that
many developing countries maintain high import tariffs on products such as
steel even though their producers are in a position to effectively “compete
internationally without protection.” These producers have the advantage of a
protected home market from which to penetrate other markets, particularly the
United States. Further, most developed countries have made it more difficult, if
not impossible, for U.S. producers to enter their markets by replacing high
tariffs with non-tariff barriers, including the use of restrictive technical
standards and by tolerating anti-competitive practices by local industries. Until
these nontariff barriers are effectively addressed, the U.S. industry will
continue to reap far less advantage from trade agreements than intended.
NAFTA has given rise to the “circumvention of antidumping orders.”
Structural steel beams from Japan and Korea are being transshipped through
Canada to circumvent antidumping orders in the United States.178 Although
176 The U.S. Government limited the tariff reduction to no more than 25 percent of
the original tariff during the Tokyo Round. Ten--year staged reductions were also
provided under NAFTA, and more recently the U.S.--Jordan Free Trade Agreement.
Also, the U.S. Government refused to review petitions to include commercial chinaware
to the Generalized System of Preference during the 1984, 1986, 1987, 1990, 1991 and
1992 review exercises.
177 Alan H. Price and John R. Shane, Wiley Rein and Fielding LLP, on behalf of
Nucor Corporation and TXI Chaparral Steel written submission to the Commission, Mar.
31, 2003.
178 The antidumping orders specifically cover merchandise that has been drilled,
punched, notched, painted, coated, or clad and include products classified under the
Harmonized Tariff Schedule numbers 7216.32, 7216.33, 7216.50--7216.99,
7228.70.3040, and 7228.70.6000.
222
there is no production of beams in Canada, U.S. imports of product from
Canada were valued at $2.3 million and $2.1 million in 2001 and 2002,
respectively. This is a two-fold problem that provides the means and
incentive for foreign producers and exporters to circumvent such U.S. duty
orders by transshipping subject merchandise through Canada and Mexico.
First, NAFTA does not provide for common enforcement of antidumping and
countervailing duty orders. Second, there are NAFTA rules for establishing
NAFTA origin for merchandise, but there is no mechanism “for ensuring that
the country of origin merchandise imported into one NAFTA country is not
altered before the merchandise is re-exported to another NAFTA country.”
Nucor and Chaparral recommend amending NAFTA to correct these
problems without relinquishing the current practice of allowing NAFTA
members to impose antidumping/countervailing duties on imports from other
NAFTA members.
Specialty Steel Industry of North America 179
Specialty Steel Industry of North America (SSINA) is an association
representing virtually all North American specialty steel producers. Specialty
steels are high technology, high value stainless and other specialty alloy
products.
The objectives of the subject trade agreements–opening markets and
adopting trade laws that ensure free and fair trade between these markets,
including the zero for zero gradual phase-out of tariffs on steel products under
the Uruguay Round Agreements–have not been met for U.S. manufacturing
industries, including SSINA.
Tokyo Round
The Tokyo Round Agreements were a major step in determining
international dumping and subsidy rules, and U.S. implementation of this
agreement afforded domestic specialty steel producers the opportunity to seek
effective redress against unfair trade practices.
Uruguay Round
The Tokyo Round trade laws governing dumping and subsidization have
been significantly modified and weakened to the detriment of U.S.
manufacturing industries by subsequent Uruguay Round Agreements and by
the World Trade Organization (WTO) Dispute Settlement Body’s interpretation
of the agreements. URA modifications have resulted in a noticeable reduction
179 David A. Hartquist and Kathleen W. Cannon, Collier Shannon Scott, PLLC, on
behalf of the Specialty Steel Industry of North America (SSINA), written submission to
the Commission, Mar. 31, 2003.
223
in dumping margins, permissible subsidy practices formerly prohibited, and
early termination of certain orders under sunset review. Further, the WTO
Dispute Settlement Body has used the settlement process to legislate and
make decisions on issues not agreed to by GATT Contracting Parties during
the Uruguay Round negotiations, which overturn U.S. laws as well as many
long-established practices and methodologies. The U.S. Congress and
Administration should not permit further weakening of the laws addressing
unfair trade practices as proposed in the current Doha Round of Negotiations
by a group of countries calling themselves by the misleading name of
Friends of Antidumping.
Tile Council of America, Inc. 180
The Tile Council of America, Inc. (TCA) is an association comprising over
40 manufacturers of ceramic tiles and related products that manufacture over
50 percent of the ceramic tile produced in the United States.
Despite a tripling in U.S. demand for ceramic tile since the Tokyo Round,
the cumulative impact of the five trade agreements under study in this
investigation have contributed to the precarious condition of the U.S. ceramic
tile industry. The tariff reduction provisions of these agreements, particularly
the Uruguay Round Agreement and NAFTA have encouraged large quantities
of low-priced imports and are a major factor in the severe erosion of the U.S.
industry’s market share. Between 1979, the year before the Tokyo Round
agreements entered into force, and the third quarter of 2002, import penetration
for ceramic tile increased by 31 percentage points in terms of quantity to a
record high of 77 percent. Since 1995, following the enactment of the Uruguay
Round Agreement and NAFTA, U.S. consumption of ceramic tile increased by
46 percent and increased imports have captured 100 percent of this growth.
The growth in import penetration is largely due to price-cutting by both
traditional and newer import sources, as demonstrated by an 18-percent
decrease in the average unit value of glazed ceramic tile imports.
Longer term staged reductions for tariffs on ceramic tile were negotiated
under the Uruguay Round Agreement and NAFTA, in part, to provide U.S.
manufacturers a period of time to make significant competitive investments in
an effort to differentiate their products and minimize competition with
low-priced commodity grade imports. The TCA now questions the viability and
likely payback of these investments in light of ever increasing low-priced
imports that have suppressed prices to the point of driving many U.S.
producers out of business. They report that during 2001-2002, four U.S.
producers have gone out of business and two additional plants have closed. The
U.S. ceramic tile council would be seriously prejudiced by further tariff
reductions or concessions and should, therefore, be excluded from such future
trade negotiations.
180 Juliana M. Cofrancesco and John F. Bruce, Howrey, Simon, Arnold, and White
on behalf of the Tile Council of America, Inc. (TCA) written submission to the
Commission, Feb. 14, 2003.
224
Western Economic Analysis Center 181
Lower U.S. tariffs across the board have “adversely affected” the U.S.
“basic copper industry by lowering the price to domestic users of imported
copper,” but they also helped to reduce U.S. production costs by “lowering the
costs of imported supplies and equipment used by domestic copper mining
firms.” Other government policies, both foreign and domestic, have had a
greater negative impact on the industry than lower tariffs. For example,
financial inducements to overseas investment and measures that have made
cheaper capital available to competing foreign copper producers had a much
more significant and harmful impact on domestic producers than any relaxing
of trade barriers because they provided no advantageous offset for the domestic
industry. The compliance deadlines imposed by regulatory agencies required a
number of producers to take on large amounts of debt financing, which forced
certain economically viable operations out of business.
The competitiveness of the domestic copper industry has been further
eroded by Federal regulatory policies that create wilderness areas, which
precluded the commercial use of economically viable copper deposits, and
pollution controls that require large capital investments. Further, the lack of an
effective antitrust policy to enforce existing legislation has resulted in a rash of
mergers and acquisitions of copper producers by non-copper producers after
1976 that seriously weakened the domestic industry. More recently, foreign
corporate and financial interests in U.S. production facilities have been allowed
to make U.S. production decisions that do not necessarily benefit U.S. capital,
labor, or consumer interests.
Transportation Equipment182
Overview
The United States is the world’s leading single-country producer and
consumer of transportation equipment. In particular, the United States is a
global leader in the production of motor vehicles and related equipment,
commercial and military aircraft, and guided missiles and space vehicles.
Motor vehicles and related equipment accounted for between 56.1 and
71.0 percent of the value of U.S. transportation equipment shipments during
1978-2001, and aircraft and parts accounted for between 15.9 and 28.1 percent
181
George F. Leaming, Director, Western Economic Analysis Center, written
submission to the Commission, Mar. 31, 2003.
182 For the purposes of this investigation, transportation equipment comprises SIC
37, which includes motor vehicles and motor vehicle equipment; aircraft and parts; ship
and boat building and repairing; railroad equipment; motorcycles, bicycles, and parts;
guided missiles and space vehicles and parts; and other miscellaneous transportation
equipment.
225
(table 5-20).183 Throughout the period, the guided missiles and space
vehicles subsector vied with the ship and boat building and repair subsector
for third place. The United States is not a global leader in the shipbuilding
or railroad subsectors. The U.S. shipbuilding sector accounted for less than
1 percent of global shipments in 2001,184 and no passenger railcars were
produced in the United States. Freight cars are largely traded among the U.S.
and Canadian subsidiaries of U.S. companies. The motorcycle and bicycle
subsectors are very small parts of the U.S. transportation equipment sector.185
The United States is a leading world producer of heavyweight motorcycles,
with the U.S. motorcycle industry enjoying worldwide brand recognition.
However, the industry is currently facing capacity constraints. Most mass
merchandise bicycle production has moved overseas.186
The U.S. transportation equipment industry is composed of thousands of
manufacturers. Typically, in subsectors such as motor vehicles and aircraft, the
U.S. industry is quite concentrated, while the industries supplying parts to these
sectors comprise thousands of firms of varying sizes. Many of the large
companies in the transportation equipment sector are multinationals that
produce and source globally. Most of the transportation equipment sectors have
grown since the implementation of the Tokyo Round, while changing
significantly in response to trends in globalization, restructuring, legislation,
and intense international competition.
The competitiveness of the U.S. transportation equipment industry is
supported by significant investment in research and development, sophisticated
manufacturing capabilities, and an educated and technically skilled workforce.
Strong domestic demand for transportation equipment products, coupled with
intense foreign competition in the U.S. market, has also contributed to the
competitiveness of the U.S. industry. Some transportation equipment sectors,
most notably the automotive industry, have engaged in production-sharing
arrangements involving lower wage countries such as Mexico. Further, the
outsourcing of major components to suppliers who offer modules with
completely installed systems has become prevalent in the automotive and
aircraft sectors.
Overall, shipments for the transportation equipment sector fluctuated during
1978-2001, with sustained periods of growth during 1982-89, 1991-95, and
1996-99. Sector shipments increased at an average annual rate of just 1 percent
during the period and were 25.3 percent higher in 2001 than in 1978. Labor
183
Because of the dominance of these two subsectors, much of the subsequent
discussion will focus on these industries, as noted.
184 Maritime Business Strategies LLC, “Shipbuilding Statistics,” found at
http://www.coltoncompany.com/shipbldg/statistics/world.htm, retrieved Aug. 15, 2002.
185 The United States is an important producer of pleasure boats; however, this is a
very small part of the transportation equipment sector.
186 U.S. Department of Commerce, ITA, U.S. Industry and Trade Outlook (New
York: The McGraw--Hill Companies, 2000), pp. 39--15 to 39--19.
226
Table 5-20
Transportation equipment:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and
exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
418.9
89.5
51.6
456.8
-37.9
428.8
106.1
50.4
484.4
-55.6
429.1
108.7
54.6
483.2
-54.1
442.4
107.7
63.3
486.8
-44.4
444.0
105.4
67.5
481.8
-37.9
19.6
12.3
21.9
11.8
22.5
12.7
22.1
14.3
21.9
15.2
1,960
1,244
2,003
1,258
2,028
1,278
2,036
1,273
2,052
1,278
17.25
17.01
16.68
16.57
16.42
337
341
336
348
347
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
391.4
53.2
47.0
397.6
-6.1
385.8
52.4
49.8
388.4
-2.6
327.0
52.3
51.4
328.0
-1.0
329.0
52.9
53.8
328.1
1.0
303.9
53.8
45.7
312.0
-8.1
Imports/apparent
consumption . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . .
13.4
12.0
13.5
12.9
16.0
15.7
16.1
16.4
17.3
15.1
375.6
63.1
47.3
391.4
-15.8
399.7
76.0
45.1
430.6
-30.9
Percentage
16.1
12.6
17.6
11.3
1,000 workers
Total employment . . . . . . . . . . . . .
Production workers . . . . . . . . . .
1,987
1,370
2,059
1,409
1,881
1,220
1,879
1,207
1,718
1,068
Hourly earnings . . . . . . . . . . . . .
16.40
16.33
16.39
16.66
16.77
1,730
1,085
1,883
1,203
Constant (1996) dollars
16.94
17.08
$1,000 per worker
Labor productivity . . . . . . . . . . . . .
See footnote at end of table.
286
274
268
273
285
331
332
227
228
Table 5-20—Continued
Transportation equipment:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and
exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
504.1
138.0
106.4
535.7
-31.6
533.7
150.9
116.3
568.3
-34.7
581.0
175.9
114.4
642.5
-61.5
559.3
189.3
108.0
640.6
-81.3
490.9
183.7
106.5
568.0
-77.1
25.8
21.1
26.6
21.8
27.4
19.7
29.6
19.3
32.3
21.7
1,845
1,256
1,893
1,264
1,888
1,251
1,852
1,222
1,760
1,145
17.21
16.97
16.99
17.27
17.44
401
422
465
458
429
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
428.1
104.2
78.0
454.3
-26.2
409.6
98.8
84.2
424.2
-14.6
435.4
101.0
89.9
446.5
-11.1
440.9
108.7
85.3
464.4
-23.5
469.5
120.8
88.6
501.8
-32.2
470.8
124.7
83.9
511.6
-40.9
465.2
129.2
92.9
501.5
-36.4
Percentage
Imports/apparent
consumption . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . .
22.9
18.2
23.3
20.6
22.6
20.6
23.4
19.3
24.1
18.9
Total employment . . . . . . . . . . . . .
Production workers . . . . . . . . . .
1,989
1,224
1,890
1,169
1,830
1,147
1,756
1,120
1,761
1,154
Hourly earnings . . . . . . . . . . . . .
16.28
16.45
16.55
16.80
17.20
24.4
17.8
25.8
20.0
1,000 workers
1,790
1,200
1,785
1,210
Constant (1996) dollars
17.06
17.19
$1,000 per worker
Labor productivity . . . . . . . . . . . . .
1
350
350
380
394
407
392
385
Includes SIC 37 (transportation equipment).
Note.—Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics.
productivity for the sector followed a similar trend, with sustained growth
during 1980-86, 1989-94, and 1996-99. The average annual increase for
productivity during the period was 1.8 percent. Employment fluctuated during
1978-2001; total employment hit a period low in 1982 at 1,718,000, and
peaked in 1989 at 2,052,000 workers. Most of the industries in the
transportation equipment sector are largely unionized. Overall, employment
decreased by 11.4 percent during 1978-2001, which corresponds to the
25.4-percent increase in the value of shipments and the resulting 50.0-percent
improvement in productivity. Hourly wage rates fluctuated during 1978-2001,
with protracted periods of growth during 1979-85 and 1990-94. For the
period, hourly wage rates rose by $1.04 (6.3 percent) to $17.44 in 2001.
The automotive industry, the lead transportation equipment subsector in
terms of shipments and trade, is global. U.S.-headquartered and
foreign-headquartered automakers and partsmakers produce vehicles and
components all over the world. Owing to its strong international presence, the
U.S. motor vehicle sector is not heavily reliant on exports. Local production
strategies have developed for a variety of reasons, including trade barriers in
foreign markets, wage rates, and enhanced ability to respond to local consumer
preferences.187 In addition, U.S. automakers in recent years have endeavored to
improve their competitiveness in certain markets and round out their product
offerings through joint ventures and equity tie-ups.
The U.S. auto industry has consolidated somewhat during the period.
Chrysler’s acquisition of American Motors Corp. in 1987 reduced the number
of U.S.-based automakers to three–General Motors Corp. (GM), Ford Motor
Co., and Chrysler Corp. Subsequently, Chrysler itself became a subsidiary of
DaimlerChrysler of Germany in 1998. The supplier segment of the industry has
also consolidated considerably. Efforts to increase efficiency led to a reduction
in the degree of vertical integration in the U.S. motor vehicle industry,
evidenced by the divestiture by GM and Ford of their in-house parts operations
in May 1999 and June 2000, respectively. Traditionally, major motor vehicle
producers have used vertical integration to coordinate the complicated process
of designing and building motor vehicles. Today, most major motor vehicle
producers worldwide, particularly those in the car and light truck segments,
still produce most of their own engines, transmissions, and body stampings.
For other components, motor vehicle producers rely on anywhere from several
hundred to several thousand suppliers.
The U.S. industry has made extensive use of production-sharing operations,
and the entire North American industry has become highly integrated. The
close integration of the U.S. and Canadian auto industries was greatly furthered
187 For more information on nontariff barriers, see Office of Automotive Affairs,
U.S. Department of Commerce, “World Motor Vehicle Import Requirements,” Aug.
2001, found at http://www.ita.doc.gov/td/auto/impreq.html.
229
by the 1965 U.S.-Canada Automotive Products Trade Agreement (APTA).188
The APTA established a “conditional free-trade zone” between the United
States and Canada for motor vehicles and original equipment parts, with
specified local content and other requirements. This integration has resulted
in significant production rationalization, intra-industry trade, and trade in
intermediate goods. Also in 1965, the Mexican Congress approved the Border
Industrialization Program, or Maquiladora Program, allowing duty-free entry
of components and materials used to assemble vehicles and parts for export
markets. Subsequently, NAFTA liberalized trade and investment rules,
thereby encouraging the rationalization of production and contributing to the
competitiveness of the North American automotive industry.
A number of U.S. Government regulations in the automotive sector shaped
the industry during 1978-2001. The most prominent of these include
regulations on fuel economy stemming from the 1973-74 oil embargo and
energy supply crisis, and the Clean Air Act of 1970,189 which gave the
Environmental Protection Agency (EPA) broad authority to regulate motor
vehicle emissions. Vehicle emissions are being further reduced by provisions of
the 1990 Clean Air Act Amendments,190 and several States have mandated
emissions standards more stringent than those enforced by the EPA.
Regulations regarding safety and labeling also played a role in the development
of the industry during the period. Safety and fuel economy regulations have
driven U.S. motor vehicle industry research and development,191 enhancing the
U.S. auto industry’s ability to compete with imported vehicles, particularly with
respect to fuel economy. Regulations requiring passenger motor vehicles
manufacturers to label their vehicles with domestic and foreign content
information enable consumers to take country-of-origin information into
account in deciding which vehicle to purchase. To the extent to which
automakers believe that country of origin is important to U.S. consumers,
labeling regulations may encourage the use of U.S. and Canadian inputs.
During 1978-2001, the U.S.-based auto industry lost domestic market share
to foreign–most notably Japanese–brands. In 1978, traditional U.S. automakers
GM, Ford, Chrysler, and American Motors accounted for approximately 84
percent of retail sales of passenger cars and light trucks;192 in 2001, GM, Ford,
and Chrysler vehicles accounted for approximately 65 percent of retail sales.193
188
17 UST 1372, TIAS No. 6093. For more information, see Dennis DesRosiers,
“Auto Pact II,” DesRosiers Automotive Reports, vol. 15, Issue 3, Feb. 28, 2001, found at
http://www.desrosiers.ca, retrieved Mar. 28, 2002.
189 P.L. 91--604, Dec. 31, 1970, 84 Stat. 1676.
190 P.L. 101--549, Nov. 15, 1990, 104 Stat. 2399.
191 For more information, see the Alliance of Automobile Manufacturers’ website, at
http://www.autoalliance.org/.
192 Ward’s Communications, e--mail communication to USITC staff, Oct. 28, 2002.
193 Ibid.
230
The oil crisis in the 1970s had a major effect on import penetration in the
U.S. passenger vehicle market. Small, fuel-efficient Japanese vehicles more
than doubled their share of the U.S. market; from 12 percent in 1975 to 27
percent in 1980. U.S. automakers lost billions of dollars during this period, and
layoffs were in the hundreds of thousands. On April 30, 1981, the U.S. and
Japanese Governments announced a voluntary restraint agreement (VRA) on
Japanese exports of passenger vehicles to the United States. While the U.S.
Government did not request an extension of the agreement in 1985, the
Japanese Government voluntarily continued the program, with limit
adjustments, until 1994. The VRA provided an impetus for Japanese
automakers to establish a manufacturing presence in the United States, because
Japanese vehicles manufactured in the United States were exempt from the
VRA.194 The first Japanese plant–Honda’s facility in Marysville, OH–was
established in 1982; by 2001, there were 9 plants (two are joint ventures with
U.S. automakers) producing 2.4 million vehicles in the United States, with an
additional 6 Japanese plants producing 2.2 million engines in the United States.
Total Japanese automotive employment in the United States in 2001 reached
48,000.195 According to the Japanese Automobile Manufacturers Association,
64 percent of the vehicles sold in the United States by Japanese automakers in
2001 were produced in North America, up from 12 percent in 1986.196 Twelve
years after Japanese automakers began assembling vehicles in the United
States, European automaker BMW opened a U.S. plant in South Carolina,
followed by Mercedes-Benz in Alabama in 1997.
In 1995, the United States and Japan signed the U.S.-Japan Agreement on
Autos and Auto Parts.197 As part of the agreement, the Government of Japan
made commitments in three important areas: improving market access for
foreign motor vehicles; eliminating regulations that limit U.S. auto parts sales
in Japan; and enhancing sales opportunities for U.S. original equipment parts
producers with Japanese automakers in the United States and Japan.
Subsequent bilateral consultations yielded commitments in other areas by
Japan. Although acknowledging some progress over the life of the Agreement,
the United States expressed concern that the overall market access objectives of
the Agreement were not met, noting decreases in U.S. exports of vehicles and
194 Localized production allows Japanese automakers to remain responsive to U.S.
market developments, alleviate potential trade friction, and dramatically reduce
transportation costs. For more information, see Political Economy Research Center,
“Voluntary export restraints on automobiles,” PERC Reports---Tangents, Sept. 1999,
found at http://www.perc.org/publications/percreports/tang_sept1999.html.
195 Japan Automobile Manufacturers Association, “Japan’s Automobile Manufacturers: Global Companies Meeting New Challenges with Advanced Technologies,”
found at http://www.jama.org, retrieved Oct. 29, 2002.
196 Ibid.
197 International Legal Materials, Nov. 1995; 34 ILM 1372.
231
parts to Japan.198 The United States stated that, the weak Japanese economy
notwithstanding, more could be done to improve access and competition in
the Japanese market.199 The Agreement expired without a continuance or
replacement at the end of 2000.200
The other important subsector in the transportation equipment sector
encompasses aircraft and parts. The competitive position of the U.S. civil
aerospace sector declined during 1978-2001. While general aviation aircraft
shipments increased during the 1990s, U.S. market share for large civil aircraft
(LCA) and helicopter shipments has declined. Military aircraft have also been
shipped in fewer numbers, while shipments of space vehicles have increased.
While there were three U.S. manufacturers producing LCA at the beginning of
the period, Boeing, McDonnell Douglas, and Lockheed, there was only one in
2001; Boeing merged with McDonnell Douglas in 1997, and Lockheed stopped
manufacturing LCA in 1985. Likewise, five U.S. companies manufacturing
fighter aircraft in 1978 were reduced to two by 2001. There has been a
considerable rise in foreign competition in the helicopter and LCA sectors
during the period.
The U.S. aircraft parts industry has also changed, as its principal customers
(airframe manufacturers) seek new methods of cost reduction. New business
practices have been adopted in reaction to customer demand; most notably, risk
sharing has been more widely adopted in contract negotiations. The rise of risk
sharing among aircraft manufacturers and their suppliers has led to
consolidation of the supplier base, which has helped suppliers acquire the
critical financial mass necessary to meet new contract demands while retaining
the ability to stay in business over the long haul. Similar to the auto industry,
aircraft suppliers are increasingly taking on supply chain management
responsibilities, including systems integration and the coordination of module
assembly.201
There have been a number of important regulatory changes during the
period that have affected the aerospace sector. In 1978, the U.S. Congress
passed the Airline Deregulation Act,202 which incrementally eliminated the
Civil Aeronautics Board’s control over the allocation of air routes among
airlines and the regulation of airfares. The effect of this deregulation was
198 Office of the United States Trade Representative press release, “U.S. and Japan
Complete Annual Review of Automotive Framework Agreement, U.S. Emphasizes Need
for Improved Market Access and Competition in Japan,” Nov. 29, 2000.
199 Ibid.
200 On Oct. 18, 2001, the Governments of Japan and the United States announced
that they would form a bilateral Automotive Consultative Group that would meet
annually.
201 For more information, please see USITC, Competitive Assessment of the U.S.
Large Civil Aircraft Aerostructures Industry, inv. No. 332--414, USITC Pub. 3433, June
2001.
202 P.L. 95--504, Oct. 24, 1978, 49 U.S. Code Sec. 1301, 1301 nt., 1302 et. seq.
232
manifold; for airlines, competition from existing and new companies became
fierce, passenger traffic boomed, and fares decreased. For airframe
manufacturers, demand for aircraft increased steadily. The General Aviation
Revitalization Act (GARA),203 enacted in August 1994, provided tort
reform204 and, in the view of many industry observers, much needed relief to
the industry.205 By the early 1990s, the general aviation sector of the aircraft
industry reportedly had lost over 100,000 jobs and production had declined
by 95 percent, and the lack of legal liability limits were a major contributing
factor to the industry’s decline.206 Since the enactment of GARA, general
aviation aircraft production in the United States has increased every year.
The 1992 U.S.-EU Agreement on Trade in Large Civil Aircraft207 limits
direct and indirect government assistance to industry. This Agreement aimed to
level the playing field for competition between the United States and Europe in
the sale of LCA208 by limiting the support that governments can provide for
the development, production, and sale of such aircraft209– support that can give
companies a competitive advantage in domestic and international markets. The
Agreement entered into force on July 17, 1992 and has no expiration date.
Effect of Trade Agreements on the Sector
Considering the dominance of motor vehicles and related equipment in this
sector, NAFTA had the most obvious direct effect on the U.S. transportation
equipment industry. However, much of the growth in production and trade that
has taken place in the U.S. transportation equipment industry since 1980 can be
attributed to factors other than the five trade agreements that are the subject of
this investigation. These factors include strong growth in demand, changes in
203 P.L. 103-298, Aug. 17, 1994, U.S. Code Sec. 40101 nt., P.L. 105-102, Nov. 20,
1997, 49 U.S. Code Sec 40101 nt.
204 Liability Reform Coalition, Liability Reform Coalition Newsletter, Mar. 2000,
found at http://www.walrc.org/Newsletters/newsletter03.html, retrieved Dec. 12, 2002.
205 For example, see National Business Aircraft Association press release, “NBAA
Expresses Optimism For Enactment Of General Aviation Revitalization Act -- Glickman,
Hansen And Kassebaum Commended For Tireless Efforts/Leadership,” June 24, 1994,
found at http://web.nbaa.org/public/news/pr/1994/19940624--023.php and Civil Justice
Association of California press release,“Legal Reform Brings Remarkable Recovery to
Fresno--area
General
Aviation,”
Feb.
15,
1996,
found
at
http://www.cjac.org/news/021596a.html, both accessed on July 30, 2003.
206 Ibid.
207 EU Council Decision 92/496/EEC, OJ L 301, Oct. 17, 1992, p. 31.
208 These aircraft are defined as having 100 or more passenger seats or weighing
more than 15,000 kg.
209 For more information on this agreement, see USITC, Global Competitiveness of
U.S. Advanced-- Technology Manufacturing Industries: Large Civil Aircraft, inv. No.
332--332, USITC Pub. 2667, Aug. 1993, app. F.
233
industry structure and production strategies, and production-sharing
arrangements. The Auto Pact has also had a major carry-through impact on
the transportation equipment industry during the period.
Although the subject trade agreements are not the primary factors driving
the expansion of the motor vehicle sector, they have contributed to that
expansion. Further, they have contributed substantially to the expansion of
transportation equipment industries other than motor vehicles and related
equipment (i.e., aircraft and parts; ship and boat building and repair; railroad
equipment; motorcycles, bicycles, and parts; guided missiles and space vehicles
and parts; and other miscellaneous transportation equipment). Of the five
agreements, the Tokyo and Uruguay Rounds had the most profound effect on
these industries as a group, particularly with respect to U.S. exports. Table 5-21
presents trade issues addressed by the subject trade agreements that were
relevant to the sector. Without the Tokyo and Uruguay Rounds, U.S. exports of
non-automotive transportation equipment likely would have been measurably
lower, while the additional removal of NAFTA, CFTA, and U.S.-Israel FTA
would yield little additional change in U.S. exports. Over the period under
consideration, the most significant increase in U.S. non-automotive
transportation equipment exports, by value and by percentage change, was in
aerospace equipment (civil and military aircraft, spacecraft, and parts); such
exports increased by over $40 billion, or by well over 1,000 percent.
Tokyo Round
Between 1980 (the year of the first stage of the Tokyo Round tariff
reductions) and 2001, total U.S. trade in transportation equipment increased at
an average annual rate of 5.1 percent, reaching $290.2 billion. Total trade
increased in every year except for 1982, 1995, and 2001. With the exception of
1981, the United States has consistently run a trade deficit in transportation
equipment. The $1-billion deficit in 1980 grew to $77.1 billion by 2001.
U.S. imports of transportation equipment increased from $52.3 billion to
$183.7 billion during 1980-2001, an average annual increase of 6.2 percent.
Sector imports slightly more than doubled during 1980-87, decreased during
1988-91, and then increased 81.9 percent during 1992-2001. U.S. exports of
transportation equipment also rose during the period, albeit at a slower rate.
U.S. exports of transportation equipment increased from $51.4 billion to $106.5
billion during 1980-2001, an average annual increase of 3.8 percent. However,
the trend in U.S. exports of transportation equipment was erratic, with exports
declining in 1982, 1984, 1986, 1993, 1995, and 1999-2001.
International trade became increasingly important during the 1980-2001
period as the sector became more globalized. Moreover, production sharing
operations in the automotive sector, particularly in Mexico, expanded, and the
integration of the North American automotive industry, accelerated by NAFTA,
also increased sector trade. Imports as a share of U.S. apparent consumption
increased from 16.0 percent to 32.7 percent, while exports as a share of
shipments increased from 15.7 percent to 22.9 percent.
234
Table 5-21
Transportation equipment: Trade issues addressed in trade agreements and U.S. tariffs
Trade issues and U.S. tariffs
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
(1979) 2.5%
(1987) 1.7%
(1984) <0.1%
(1995) <0.1%
(1987) 0.1%
(1998) <0.1%
(1994) 1.6%
(1999) 1.2%
(1993) 0.4%
(2001) <0.1%
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Import licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Customs valuation . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Government procurement . . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
X
X
X
X
X
X
Rules of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
TRIMs3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
X
TRIPS4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agreement on Trade in Civil Aircraft . . . . . . . . . . .
Trade in automobile goods . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
Trade and investment in the automotive sector
(annex to chapter 3) . . . . . . . . . . . . . . . . . . . . . . .
1
2
X
The NAFTA provides that tariffs be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2003 for all other goods.
Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the world
during the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates in
parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
3 Trade-related investment measures.
4 Trade-related aspects of intellectual property rights.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative,
Trade Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
235
The effect of the Tokyo Round on the U.S. motor vehicle and parts
industry was modest, while the effect on other transportation equipment was
more significant. U.S. tariffs on sector products were generally already
relatively low prior to the agreement (table 5-37),210 and tariffs on these
products in many major foreign markets were generally also low.211 The
increases in total transportation equipment trade during this period can be
attributed to market factors212 as well as to Tokyo Round trade liberalization.
The plurilateral Agreement on Trade in Civil Aircraft (ATCA) was one of
the most important components of the Tokyo Round for the sector. The ATCA
provided for the elimination of customs duties on civil aircraft and most parts
and equipment of such aircraft, and also provided for the reduction or
elimination of a number of nontariff measures, such as governmental subsidies,
government-directed procurement, technical barriers, and import and export
licensing requirements. However, certain ATCA provisions were either
ambiguous or lacking in sufficient specificity to ensure full international
compliance.213
For military aircraft, the Tokyo Round did reduce U.S. and major trading
partner tariffs, but these were generally waived anyway. Moreover, government
procurement was identified as one of the greatest restrictions on trade in
military aircraft. However, the Tokyo Round agreement on government
procurement had little impact on this subsector for a number of reasons. First,
the agreement was only binding between countries that chose to sign; second,
the agreement allowed signatories to determine the products and services
covered; third, the agreement only covered purchases over a certain monetary
210 One notable exception is the 25--percent U.S. tariff on most trucks, which
remains in effect.
211 U.S. motor vehicle exports to Canada, the leading market, were already largely
free of duty as a result of the APTA, and Japan eliminated its tariffs on most motor
vehicles unilaterally in 1978. The EEC did not make Tokyo Round tariff concessions on
most motor vehicles. Some market access gains were likely made as a result of tariff
reductions in the motor vehicle parts sector. With respect to aircraft and parts, the other
leading transportation equipment subsector, import tariffs on commercial and military
aircraft in major markets, which could be sizeable in some markets, were generally
waived because the importance of these aircraft in terms of economic health and national
security.
212 For example, in the aircraft industry, factors such as quality, financing, offsets,
and delivery date are overwhelmingly more important to production and trade patterns
than multilateral trade agreements.
213 U.S. International Trade Commission, Agreements Being Negotiated at the
Multilateral Trade Negotiations on Geneva, MTN Studies 6, Part 4, inv. No. 332--101
(Washington, DC: U.S. GPO, 1979); and U.S. industry officials, interviews by USITC
staff, Dec. 18, 1992 and Feb. 18, 1993, in connection with USITC, Global
Competitiveness of U.S. Advanced--Technology Manufacturing Industries: Large Civil
Aircraft, inv. No. 332--332, USITC Pub. 2667, Aug. 1993, p. F--2.
236
value; fourth, developing signatory countries were permitted to negotiate
offsets; and fifth, the agreement did not cover actions taken in the interest of
national security.214 As a result, signatories generally have not applied the
agreement on government procurement to a large percentage of their defense
purchases.215 In the motor vehicles sector, significant foreign policy measures
such as taxes based on engine size and complicated distribution systems were
not addressed; however, foreign tariff reduction commitments made by
certain major markets were beneficial to the U.S. motor vehicle parts
industry.216 For “railroad equipment and miscellaneous transportation
equipment” (transportation equipment other than automotive and aerospace),
the EC’s tariff concession on U.S. exports amounted to a 2.5 percentage
point reduction on the applied rate, Canada’s reduction was 3.6 percentage
points on the applied rate, and Japan’s reduction was 2.1 percentage points on
the applied rate.217
U.S.-Israel FTA218
Total U.S. trade with Israel in transportation equipment increased at an
average annual rate of 6.0 percent during 1985-2001, reaching $1.7 billion.
Trade with Israel changed very little, increasing from 0.5 percent of total U.S.
trade in transportation equipment to 0.6 percent during the same period. U.S.
exports of sector products to Israel increased by 137.3 percent to $1.2 billion
during 1985-2001, while U.S. imports from Israel increased by 184.4 percent to
$499 million (table 5-22).
When the U.S.-Israel FTA was negotiated, the trade-weighted U.S. tariff
rate on transportation equipment imports from Israel was less than one percent
ad valorem. The aircraft and parts subsector accounts for the largest share of
U.S. transportation equipment imports from and exports to Israel; most of this
trade is in civil products as opposed to military ones. U.S. exports of motor
vehicles and parts to Israel increased substantially during the 1990s.
214
U.S. House of Representatives, Committee on Government Reform and
Oversight, “Foreign Offset Demands in Defense and Civil Aerospace Transactions,”
Minority Staff Report, Oct. 23, 1998, p. 20.
215 Ibid.
216 USITC, Agreements Being Negotiated at the Multilateral Trade Negotiations on
Geneva, MTN Studies 6, Part 5, Industry/Agriculture Sector Analysis, inv. No. 332--101
(Washington, DC: U.S. GPO, 1979).
217 Office of the United States Trade Representative, Twenty--Fourth Annual Report
Of the President Of the United states On the Trade Agreements Program, 1979, p. 59.
218 The U.S.--Israel FTA was signed in 1985 and was fully implemented on Jan. 1,
1995.
237
238
Table 5-22
Transportation equipment: U.S. trade with Israel, 1984-2001
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
186.1
107,528.7
263.2
105,112.8
302.5
103,867.1
359.8
98,453.9
258.5
100,726.4
107,714.7
105,376.0
104,169.6
98,813.7
100,984.9
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
196.0
75,749.2
175.4
89,312.4
244.5
105,826.0
202.8
108,514.0
Total . . . . . . . . . . . . .
75,945.2
89,487.8
106,070.5
108,716.8
Percent
Israel/Total . . . . . . . . . . .
0.3
0.2
0.2
0.2
0.2
0.3
0.3
0.4
0.3
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
—
—
-10.5
17.9
39.4
18.5
-17.1
2.5
-8.3
-0.9
41.5
-2.3
14.9
-1.2
19.0
-5.2
-28.2
2.3
Total . . . . . . . . . . . . .
—
17.8
18.5
2.5
-0.9
-2.2
-1.1
-5.1
2.2
636.9
62,645.8
656.1
66,848.9
722.2
77,272.5
1,046.2
83,159.0
1,293.9
88,586.2
63,282.7
67,504.9
77,994.7
84,205.2
89,880.1
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
653.3
44,399.4
499.6
51,101.1
421.5
50,005.8
666.9
53,949.0
Total . . . . . . . . . . . . .
45,052.7
51,600.6
50,427.3
54,615.9
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
1.5
1.0
0.8
1.2
1.0
1.0
0.9
1.2
1.4
—
—
-23.5
15.1
-15.6
-2.1
58.2
7.9
-4.5
16.1
3.0
6.7
10.1
15.6
44.9
7.6
23.7
6.5
Total . . . . . . . . . . . . .
—
14.5
-2.3
8.3
15.9
6.7
15.5
8.0
6.7
See note at end of table.
Table 5-22—Continued
Transportation equipment: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
440.5
137,552.5
490.3
150,432.7
426.4
175,422.6
458.8
188,827.8
498.8
183,154.4
137,993.0
150,993.0
175,849.1
189,286.6
183,653.2
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
218.7
108,509.8
251.4
120,567.2
352.8
124,360.5
477.9
128,757.3
Total . . . . . . . . . . . . .
108,728.5
120,818.6
124,713.3
129,235.2
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.2
0.2
0.3
0.4
0.3
0.3
0.2
0.2
0.3
-15.4
7.7
15.0
11.1
40.3
3.2
35.5
3.5
-7.8
6.8
11.3
9.4
-13.0
16.6
7.6
7.6
8.7
-3.0
Total . . . . . . . . . . . . .
7.7
11.1
3.2
3.6
6.8
9.4
16.5
7.6
-3.0
804.2
105,586.6
1,577.9
114,682.8
1,809.2
112,566.7
955.6
107,011.7
1,185.7
105,327.8
106,390.8
116,260.8
114,375.8
107,967.2
106,513.5
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
1,249.5
84,020.3
1,462.2
87,141.5
1,080.3
82,768.0
789.1
92,097.7
Total . . . . . . . . . . . . .
85,269.9
88,603.8
83,484.3
92,886.8
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
1.5
1.7
1.3
0.9
0.8
1.4
1.6
0.9
1.1
-3.4
-5.2
17.0
3.7
-26.1
-5.0
-27.0
11.3
1.9
14.7
96.2
8.6
14.7
-1.9
-47.2
-4.9
24.1
-1.6
Total . . . . . . . . . . . . .
-5.1
3.9
-5.4
10.8
14.5
9.3
-1.6
-5.6
-1.4
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
239
U.S.-Canada FTA
U.S. trade with Canada in transportation equipment increased at an average
annual rate of 3.5 percent during 1988-2001, reaching $89.8 billion (table
5-23). Total U.S. trade with Canada in transportation equipment increased at
approximately the same average annual rate as total U.S. sector trade with the
rest of the world. U.S. exports of transportation equipment to Canada increased
51 percent to $33.4 billion during 1988-2001, while U.S. imports of sector
products from Canada increased 59.2 percent to $56.4 billion. Canada replaced
Japan as the leading source of U.S. sector imports in 1992 and remained the
largest supplier through 2001.
As the overwhelming portion of total transportation equipment imports
from Canada and Japan is accounted for by motor vehicles and motor vehicle
parts, the shift to Canada as the leading import source can be explained by the
increased integration of the U.S. and Canadian automotive industries that began
in 1965 with the APTA,219 as well as a stabilization of U.S. imports from
Japan during the late 1980s and early 1990s as Japanese automakers increased
their production in the United States. Therefore, it is likely that the
U.S.-Canada FTA had a minor effect on U.S. transportation equipment sector
trade and production.
NAFTA
U.S. sector trade with NAFTA partners rose steadily after NAFTA entered
into force in 1994, before declining slightly in 2000 and 2001 for Canada, and
in 2001 for Mexico. These declines were a result of market factors such as
changes in automotive demand and production strategies. Total trade with
Canada increased at an average annual rate of 2.8 percent during 1994-2001,
below the average rate for the rest of the world (5.8 percent), while total trade
with Mexico increased at an average annual rate of 13.8 percent during the
period.
The impact of NAFTA on U.S. trade in transportation equipment has been
significant largely because of the importance of Canada and Mexico as U.S.
trading partners. Much of the increase in sector trade between the three
countries can be attributed to increased integration of the automotive industries
and markets throughout the continent and to production sharing operations of
U.S. automotive firms in Mexico. On implementation of NAFTA, Mexico
immediately eliminated or reduced significant trade restrictions; for example,
Mexico eliminated its trade balancing requirement, lowered its local content
requirement, and eliminated import quotas on new cars and light trucks (quotas
for heavy trucks and buses were eliminated in January 1998). These actions,
along with the elimination of Mexican tariffs of up to 20 percent, increased
U.S.-Mexican total trade in the automotive sector.220
219 The APTA was made largely redundant by the U.S.--Canada FTA, which was in
turn superseded by the NAFTA in 1994.
220 Office of the United States Trade Representative, Study on the Operation and
Effects of the North American FTA (Washington, DC: 1997), pp. 45--51.
240
Table 5-23
Transportation equipment: U.S. trade with Canada and Mexico, 1987-2001
Year
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
1987
1988
1989
1990
1991
Millions of constant (1996) dollars
1992
1993
1994
30,607.9
3,627.6
74,481.3
108,716.8
35,426.8
4,078.8
68,209.2
107,714.7
35,687.0
3,716.8
65,972.3
105,376.0
35,035.3
4,858.7
64,275.7
104,169.6
32,936.0
5,284.6
60,593.2
98,813.7
34,562.2
6,054.3
60,368.5
100,984.9
38,994.3
6,969.7
62,764.5
108,728.5
44,426.0
8,606.9
67,785.7
120,818.6
28.2
3.3
32.9
3.8
33.9
3.5
33.6
4.7
33.3
5.4
34.2
6.0
35.9
6.4
36.8
7.1
—
—
—
—
15.7
12.4
-8.4
-0.9
0.7
-8.9
-3.3
-2.2
-1.8
30.7
-2.6
-1.1
-6.0
8.8
-5.7
-5.1
5.0
14.6
-0.4
2.2
12.8
15.1
4.0
7.7
13.9
23.5
8.0
11.1
23,062.8
4,565.2
56,577.2
84,205.2
23,287.3
5,694.3
60,898.5
89,880.1
25,533.8
5,190.0
54,546.1
85,269.9
29,510.0
6,299.5
52,794.4
88,603.8
Percent
Canada/Total . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
20,108.8
2,025.4
32,481.7
54,615.9
22,112.1
2,529.8
38,640.9
63,282.7
21,047.5
3,042.2
43,415.3
67,504.9
23,327.0
4,224.9
50,442.8
77,994.7
36.8
3.7
34.9
4.0
31.2
4.5
29.9
5.4
27.4
5.4
25.9
6.3
29.9
6.1
33.3
7.1
—
—
—
—
10.0
24.9
19.0
15.9
-4.8
20.3
12.4
6.7
10.8
38.9
16.2
15.5
-1.1
8.1
12.2
8.0
1.0
24.7
7.6
6.7
9.7
-8.9
-10.4
-5.1
15.6
21.4
-3.2
3.9
Percent
241
Canada/Total . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
See note at end of table.
242
Table 5-23—Continued
Transportation equipment: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
53,223.1
17,981.9
79,718.0
63,027.6
21,376.0
91,445.5
62,226.9
26,659.0
100,400.7
56,398.8
25,981.0
101,273.5
150,923.0
175,849.1
189,286.6
183,653.2
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
46,298.4
12,071.2
66,343.7
48,004.4
15,535.5
65,695.3
50,501.9
16,488.9
71,002.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
124,713.3
129,235.2
137,993.0
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
37.1
9.7
37.1
12.0
36.6
12.0
35.3
11.9
35.8
12.2
32.9
14.1
30.7
14.2
4.2
40.3
-2.1
3.7
28.7
-1.0
5.2
6.1
8.1
5.4
9.1
12.3
18.4
18.9
14.7
-1.3
24.7
9.8
-9.4
-2.5
0.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2
3.6
6.8
9.4
16.5
7.6
-3.0
34,486.2
8,639.6
73,134.8
37,569.9
8,688.4
68,117.5
37,210.6
11,033.2
59,723.4
33,388.6
10,836.5
62,288.4
116,260.8
114,375.8
107,967.2
106,513.5
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
30,860.0
4,236.6
48,751.7
31,699.9
5,237.1
55,949.8
35,377.3
7,786.6
63,227.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
83,484.3
92,886.8
105,390.8
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
36.8
5.1
34.1
5.6
33.3
7.3
29.7
7.4
32.9
7.6
34.5
10.2
31.4
10.2
4.6
-32.8
-7.7
2.7
23.6
14.8
11.6
48.7
13.0
-2.5
11.0
15.7
8.9
0.6
-6.9
-1.0
27.0
-12.3
-10.3
-1.8
4.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
-5.4
10.8
14.5
9.3
-1.6
-5.6
-1.4
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
Uruguay Round
During 1995-2001, U.S. trade in transportation equipment increased at an
average annual rate of 5.7 percent, reaching $290.2 billion. Imports of
transportation equipment increased by 47.3 percent during this period to $184
billion, while exports of such goods increased by 27.6 percent to $107 billion.
U.S. shipments also grew throughout 1995-2001, increasing by 4.3 percent to
$491 billion.
While Canada and Japan have consistently been the leading two sources of
U.S. transportation equipment imports, Mexico made significant strides during
this period, becoming the third-leading import source in 1995. Other countries
that have been among the leading suppliers of U.S. transportation equipment
imports are Germany, France, and the United Kingdom. Sector imports are
overwhelmingly (at least 80 percent) accounted for by motor vehicles and
motor vehicle parts. On the other hand, motor vehicles and parts and aircraft
and parts vie for first and second place each year as the leading sector export.
The leading export market for transportation equipment has consistently been
Canada, accounting for approximately one-third of total U.S. exports of these
products. Mexico rose to replace Japan as the second-leading market in 1998.
Subsequently, Japan was surpassed by the United Kingdom and Germany to
finish 2001 as the fifth-leading market for U.S. transportation equipment
exports.
The overall worldwide Uruguay Round percentage point reduction for U.S.
“Transport Equipment” exports was 3.5.221 However, much of the increase in
U.S. trade following implementation of the Uruguay Round can be attributed to
factors such as expanding markets in the United States and overseas, as well as
further globalization of the automotive industry–specifically, increased
integration of the North American automotive industry. Tariff reductions
negotiated under the Uruguay Round were largely inconsequential in the motor
vehicle subsector, as most trade with Canada and Japan was already duty free,
and the EU did not make significant duty reduction commitments.222
With respect to motor vehicle parts, the majority of subsector trade was
with Canada and Mexico, and already free of duty or subject to reduced duties.
221 This calculation excludes countries participating in free trade agreements with
the United States at that time, and also excludes certain products such as automotive
engines. Based on J. Michael Finger, Merlinda D. Ingco, and Ulrich Reincke, The
Uruguay Round: Statistics on Tariff Concessions Given and Received (Washington, DC:
The World Bank, 1996).
222 USITC, Potential Impact on the U.S. Economy and Industries of the GATT
Uruguay Round Agreements, inv. No. 332--353, USITC Pub. 2790, June 1994, pp. VI--5
to VI--7.
243
The URA negotiations attempted to harmonize developed-country tariffs at 2
percent ad valorem; this goal was largely met in the EU, but was less
successfully negotiated in Latin America and Asia. Japan, however, did agree
to bind its tariffs at zero, and Australia, Korea, and Singapore agreed to
reduce tariffs to 2 percent. Besides tariff concessions, which seem to have
had a limited effect on U.S. production and trade, the agreements on TRIMs,
TRIPs, rules of origin, and to a lesser extent, safeguards, were positive
outcomes for the U.S. motor vehicle parts industry.223
In the civil aircraft and parts subsector, trade was already largely free of
duty; duty reductions negotiated under the URA were minimal. The agreement
on subsidy and countervailing measures theoretically allowed the U.S. civil
aerospace industry to accept, without risk of international action, direct U.S.
Government support of research and development. In effect, however, the result
of this URA provision was minimal.224
Forest and Fishery Products225
Overview
The United States is the world’s largest producer of forest products and the
fifth-largest producer of fishery products. The forest products subsector
consists of two industries; wood products, and paper and allied products. U.S.
production of wood products in 2001 reached 632 million cubic meters, or
about 17 percent of the world’s total, more than twice the output of the next
largest producer, China.226 U.S. production of paper and allied products in
2001 reached 177 million metric tons, or about 29 percent of the world’s total,
more than twice the output of the next largest producer, also China. U.S.
production of fishery products in 2001 reached 4.31 million metric tons, or
about 4 percent of the world’s total, behind China, India, Japan, and Peru (table
5-24).227 Canada produces a similar mix of both forest and fishery products,
and is a major competitor in the U.S. market, as well as in major foreign
markets such as Japan and the EU. The U.S. forest and fishery products
223 Motor and Equipment Manufacturers Association, official submission to USITC
in connection with USITC, Potential Impact on the U.S. Economy and Industries of the
GATT Uruguay Round Agreements, Vol. I, inv. No. 332--353, USITC Pub. 2790, June
1994, p.VI--11.
224 Ibid, pp. VI--13 to VI--15.
225 For the purposes of this investigation, forest and fishery products comprise SIC
groups 08, 09, 24, 26, and 27. Processed seafood products are not included here; they are
included in the discussion of agriculture elsewhere in this report.
226 Food and Agriculture Organization of the United Nations.
227 Food and Agriculture Organization of the United Nations, and the
U.S. Department of Commerce.
244
Table 5-24
Forest and fishery products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption
and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
370.6
24.6
11.8
383.3
-12.8
387.0
26.3
13.3
400.0
-13.0
415.6
29.5
16.4
428.8
-13.2
433.8
30.6
20.4
444.0
-10.2
439.9
30.5
22.9
447.5
-7.6
6.5
3.5
6.4
3.2
6.6
3.4
6.9
3.9
6.9
4.7
6.8
5.2
2,623
2,767
2,808
2,847
2,931
2,999
3,008
1,758
1,864
1,889
1,928
1,980
2,019
2,009
12.99
13.03
12.90
12.75
12.66
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
341.3
23.5
13.4
351.3
-10.0
351.1
25.2
16.4
360.0
-8.9
343.0
22.1
17.9
347.2
-4.3
337.5
21.3
16.0
342.8
-5.3
324.3
18.9
14.1
329.2
-4.9
Imports/apparent
consumption . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . .
6.7
3.9
7.0
4.7
6.4
5.2
6.2
4.8
5.8
4.3
360.2
22.7
13.7
369.1
-8.9
369.9
24.7
12.8
381.8
-11.9
Percentage
6.1
3.8
1,000 workers
Total employment:
Forest and fishery
products2 . . . . . . . . . . . . . . . . . .
Production workers:
Forest and fishery
products2 . . . . . . . . . . . . . . . . . .
2,651
2,714
2,641
2,627
2,538
1,850
1,893
1,805
1,777
1,687
Constant (1996) dollars
Hourly earnings:
Forest and
fishery products3 . . . . . . . . . . .
See footnotes at end of table.
12.87
12.83
12.83
12.75
12.90
13.58
12.96
245
246
Table 5-24—Continued
Forest and fishery products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption
and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
476.7
38.9
28.7
486.9
-10.2
483.9
40.1
25.9
498.3
-14.4
495.0
43.6
26.3
512.6
-17.6
494.4
46.3
27.8
513.2
-18.8
452.6
43.2
24.9
471.3
-18.8
7.8
6.1
8.0
6.0
8.1
5.4
8.6
5.3
9.1
5.6
9.3
5.5
3,008
3,002
3,032
3,055
3,055
3,034
2,911
2,005
2,000
2,023
2,029
2,017
1,993
1,898
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
433.5
28.1
24.5
437.1
-3.6
411.6
25.8
25.1
412.3
-0.7
426.0
27.0
26.1
426.9
-0.9
436.4
29.6
25.3
440.8
-4.4
453.0
32.8
26.3
459.4
-6.4
Imports/apparent
consumption . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . . . .
6.4
5.7
6.3
6.1
6.3
6.1
6.7
5.8
7.1
5.8
486.9
38.3
30.5
494.7
-7.8
472.5
37.3
26.8
481.0
-8.5
Percentage
7.8
6.3
1,000 workers
Total employment:
Forest and fishery
products2 . . . . . . . . . . . . . . . . . .
Production workers:
Forest and fishery
products2 . . . . . . . . . . . . . . . . . .
2,999
2,899
2,877
2,918
2,984
1,997
1,917
1,911
1,944
1,993
Constant (1996) dollars
Hourly earnings:
Forest and
fishery products3 . . . . . . . . . . .
12.58
12.48
12.47
12.39
12.36
12.38
12.49
12.60
12.81
13.02
13.14
13.20
1 Includes SIC 08 (forestry), 09 (fishing, hunting, and trapping), 24 (lumber and wood products, except furniture), 26 (paper and allied products), and 27 (printing, pub-
lishing, and allied industries).
2 Includes employment for SIC 24 (lumber and wood products, except furniture), 26 (paper and allied products), and 27 (printing, publishing, and allied industries).
3 Hourly earnings for production workers employed in SIC 24, SIC 26, and SIC 27.
Note.—Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics.
industries both have access to significant quantities of natural resources,
state-of-the-art technology, and a large domestic market for high-value goods.
The U.S. forest and fishery products subsectors focus mainly on the domestic
market. U.S. exports of high-value products are small but growing.
The forest products subsector produces an array of goods, including lightly
processed products such as firewood; industrial products such as plywood,
containerboard, and paper; and high-value consumer products such as
stationery and scented tissue. The wide range of products reflects the great
variety of hardwood and softwood trees available to the industry from various
U.S. regions. The subsector consists primarily of large, vertically integrated
firms that produce both paper and wood products. Many paper products, for
example, are made by paper mills that process their own raw material from
pulpwood and residual chips from the wood products subsector. Production of
wood products is typically integrated from the harvest of trees, to the
distribution of lumber products to retailers. Although a number of firms
produce and distribute nationwide, they generally do not invest internationally,
with the exception of significant cross-border investment with Canada.
In recent decades, recycling of paper products has become an important
part of the industry in the United States: 25 percent or more of all paper
products are recycled.228 This has enabled the industry to supply growing
demand for paper without requiring proportionate amounts of new forest
resources. Most technological development in the past two decades in this
sector has been in the production of paper and allied products.
The fishery products subsector produces a wide range of seafoods and
other products. Important products include shrimp, tuna, and salmon, as well as
industrial products such as fish meal (used in animal feeds) and fish oil (used
in paints and other industrial uses). The U.S. industry has a distinct advantage
over its foreign rivals in its proximity to the domestic market, which is an
important consideration for a perishable product such as seafood. However, the
U.S. industry may be disadvantaged by labor costs and environmental controls
limiting the industrial development of some coastal areas.229
The fishery products subsector as defined in this investigation is composed
of two broad industries, harvesting and aquaculture (fish farming). Commercial
fish harvesting takes place along all U.S. coasts, on the high seas, and in
freshwater bodies such as the Great Lakes. This subsector is highly
disaggregated, consisting of thousands of firms most of which operate a single
vessel. However, the size of these enterprises varies widely, from small inshore
craft costing a few hundred dollars, to huge ocean-going vessels requiring an
investment in excess of $20 million. The appropriate scale and technology for
the enterprise generally depends on the type of fish targeted. The principal
228
USITC, Industry & Trade Summary: Wood Pulp and Waste Paper, USITC Pub.
3490 Feb. 2002, pp. 22--25.
229 USITC staff interview with fishery industry officials, June 2003.
247
equipment needed to harvest certain species of clams are tongs and
waterproof boots, while most species of tuna require vessels capable of
carrying a helicopter and sufficient fuel to traverse entire oceans.
U.S. shipments of forest and fishery products increased from $341 billion
in 1978 to $453 billion in 2001 (33 percent), fluctuating during this period
from a low of $324 billion in 1982 to a high of $495 billion in 1999. Peaks and
troughs during this period were generally attributable to overall conditions in
the U.S. economy; the wood products sector, in particular, mirrors the highly
volatile housing and construction industries. U.S. sector exports approximately
doubled between 1978 and 2001, reaching $25 billion, although as a share of
production they have remained relatively steady, at 5 to 6 percent of production
value. Imports grew during the period both in absolute terms and as a share of
apparent consumption, from 6.4 percent, or $28 billion, in 1990, to more than 9
percent, or $46 billion, by 2000. Apparent consumption has outpaced
production, especially in recent years, rising by 17 percent to $513 billion
during 1990-2000.
Trade is an important component of the market for many forest products.
Trade in certain products has been the subject of disputes – perhaps most
notably the softwood lumber issue with Canada. In 1996, Canada and the
United States negotiated the Softwood Lumber Agreement (SLA) that provided
for a quota agreement between the two countries. However, the SLA expired in
2001, and shortly thereafter the U.S. softwood products industry filed petitions
under U.S. antidumping and countervailing duty statutes.230
Employment in the wood and paper products industries (fishing
employment is not currently available) grew from 1.6 million workers in 1978
to a peak of 2.0 million workers in 1998, before declining to 1.9 million
workers in 2001. The decline from the peak levels of the late 1990s has been
especially pronounced in the paper and printing subsectors, where recent
recessionary impacts have combined with a longer-run trend toward industry
consolidation and overseas migration. The wood products industry is
particularly vulnerable to recessions; employment in mobile home construction
and the production of home furnishings (such as kitchen cabinets), wood
pallets, and shipping containers are especially volatile.
Hourly earnings, however, have been sustained throughout the period by
high rates of labor productivity growth. Output per worker grew from less than
230 See, e.g., Softwood Lumber from Canada, inv. No. 701--TA--312, USITC Pub.
2469, Dec. 1991, pp. A--3 to A--6. The MOU was signed on Dec. 30, 1986, prior to
Commerce’s final determination in the countervailing--duty investigation that year.
Under this agreement, Canada agreed to charge an export tax to offset benefits accruing
to its lumber producers and exporters. However, on Sept. 9, 1991, Canada ended the
export tax, leading to the above--cited investigation (which was self--initiated by the
Department of Commerce). At the same time, USTR initiated a section 301
investigation. Both actions were terminated following bilateral discussions.
248
$190,000 in the 1970s to nearly $220,000 by 1990, and almost $250,000 by
2000. As a result, inflation-adjusted earnings per worker grew from $12.64 to
$13.18 per hour during 1990-2000.
Both the forest and fishery products industries have access to
state-of-the-art technology, which helps sustain U.S. industry competitiveness
in the face of rivals with lower labor costs, such as in Asia and Latin America.
In addition, proximity to the domestic market is important in subsectors such as
printing and publishing, especially for periodicals such as newspapers.
However, efficiency has been hampered by government regulations covering
such areas as pollution control. By one estimate, pollution abatement costs for
the pulp and paper industry are nearly five times the U.S. manufacturing
average.231 According to the same source, every one-percent increase in
spending on pollution abatement decreases productivity by five percent.
Globalization has led to expansion by U.S. firms mainly in the printing and
publishing industries, where satellite communication enables the transmission
of text and data to multiple production locations virtually simultaneously. In
addition to the significant U.S.-Canada cross-border investment noted above,
there has been increased U.S. industry investment in various Asian economies
to take advantage of expanding markets there for newspapers and other
publications.232
Effect of Trade Agreements on the Sector
The five trade agreements that are the subject of this investigation have had
little direct effect on U.S. production and trade in the forestry and fisheries
sector. This is because the principal area of sector concern addressed by such
agreements has been tariffs, and U.S. tariffs in this sector have historically been
very low (below 2 percent ad valorem) (table 5-25). During the period covered
by this investigation, production grew by an average of 1.8 percent annually, a
pace maintained fairly steadily throughout the period. The average annual
growth rate for both imports and exports showed no clear trend during the
period despite modest declines in tariffs. U.S. import trends depend mainly on
macroeconomic activity that affects housing starts and other variables. Export
performance is affected less by foreign trade barriers than by macroeconomic
conditions abroad (such as the Asian financial crisis) and the value of the U.S.
dollar.
231 U.S. Department of Commerce, Bureau of the Census, “Measuring the
Productivity Impact of Pollution Abatement,” SB93--13, Nov. 1993; cited in USITC,
Industry & Trade Summary: Wood Pulp and Waste Paper, USITC Pub. 3490, Feb. 2002,
p. 11.
232 USITC, Industry & Trade Summary: Newsprint, USITC Pub. 3355 (Sept. 2002),
p. 8.
249
250
Table 5-25
Forest and fishery products: Trade issues addressed in trade agreements and U.S. tariffs
Trade issues and U.S. tariffs
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
(1979) 1.4%
(1987) 0.7%
(1984) 0.2%
(1995) 0.1%
(1987) 0.3%
(1998) <0.1%
(1994) 0.5%
(1999) 0.3%
(1993) 0.1%
(2001) <0.1%
X
X
X
Customs valuation . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
1 The NAFTA provides that tariffs be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2008 for all other goods.
2 Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the world
during the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates in
parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative,
Trade Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
Tokyo Round
Between 1980, when the Tokyo Round Agreements entered into effect, and
2000, U.S. industry shipments in this sector grew by 1.8 percent annually to
$494 billion, and then decreased by 8.5 percent in 2001. U.S. imports in this
sector grew by 3 percent annually, from $22.1 billion in 1980 to $43.6 billion
in 2001. The low long-run average, however, hides some large annual increases
(more than ten percent in 1984, 1987, 1994, and 1995) and decreases (more
than ten percent in 1980 and 1982). U.S. sector exports during this period grew
by 2.7 percent annually, from $17.9 billion in 1980 to $25.8 billion in 2001.
Large annual increases (in excess of ten percent) occurred in 1986-89 and
1995. Large decreases occurred in 1981-82 and 2001. In general, trends in this
sector closely follow general macroeconomic conditions, because the sector is
closely tied to major industries such as housing and other construction, which
are strongly affected by the overall level of economic activity.
The Tokyo Round had the effect of lowering U.S. tariffs in this sector from
an average 1.4 percent ad valorem in 1979, to 0.7 percent in 1989, when the
U.S.-Canada trade agreement took effect. During this period, sector shipments
rose by 2.2 percent annually, imports by 2.5 percent annually, and exports by
0.7 percent annually. This period was marked by a sharp recession in 1981-82,
which dramatically slowed both imports and exports, as well as general
industry production. As forest product tariffs have been reduced over the last
30 years, nontariff barriers have become more prevalent. Types of nontariff
barriers include regulatory restrictions (building codes and standards),
certification programs (nongovernment product standards), government
intervention (forestland ownership and industry assistance), and export
restrictions (taxes, quotas, and bans). Although the Tokyo Round addressed
many nontariff issues, the softwood lumber dispute233 has a much greater
impact on U.S.-Canada trade in sector products.
U.S.-Israel FTA
Sector trade with Israel grew significantly between 1985, the initial year of
the agreement, and 2001. Total exports grew by nearly $50 million, or 84
percent, from $57.1 million in 1985 to $104.9 million in 2001. Total imports
grew by $35 million, or 200 percent, from $17.6 million in 1985 to
$52.7 million in 2001 (table 5-26).
However, it is unlikely that the trade agreement contributed significantly to
this growth. The average U.S. tariff on sector imports from Israel was only 0.2
percent ad valorem prior to the agreement, and 0.1 percent after its
implementation. Israel’s tariff treatment for sector exports declined by a
similarly small amount. As a share of total U.S. exports in this sector, exports
233 See, e.g., USITC, Softwood Lumber from Canada, inv. No. 701--TA--197
(Prelim.), USITC Pub. 1320, Nov. 1982; Softwood Lumber from Canada, inv. No.
701--TA--274 (Prelim.), USITC Pub. 1874, July 1986.
251
252
Table 5-26
Forest and fishery products: U.S. trade with Israel, 1984-2001
Year
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
1984
1985
1986
1987
1988
Millions of constant (1996) dollars
16.5
24,719.8
24,736.3
17.6
24,585.6
24,603.1
22.7
26,240.1
26,262.8
21.1
29,499.0
29,520.1
0.1
0.1
0.1
0.1
—
—
—
6.3
-0.5
-0.5
29.3
6.7
6.8
-7.0
12.4
12.4
1989
1990
1991
1992
26.2
30,461.0
30,487.2
31.8
28,100.1
28,132.0
28.0
25,765.3
25,793.3
37.7
26,954.6
26,992.3
0.1
0.1
0.1
0.1
0.1
3.9
3.6
3.6
19.7
-0.3
-0.3
21.3
-7.8
-7.7
-12.1
-8.3
-8.3
34.5
4.6
4.7
112.1
22,820.1
22,932.2
130.8
24,399.2
24,530.0
232.5
24,832.4
25,064.9
127.3
25,990.0
26,117.3
21.9
30,562.6
30,584.5
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
61.4
12,771.5
12,832.9
57.1
11,785.5
11,842.6
70.8
13,179.5
13,250.3
94.4
16,253.1
16,347.5
94.5
20,281.1
20,375.6
0.5
0.5
0.5
0.6
0.5
0.5
0.5
0.9
0.5
—
—
—
-7.0
-7.7
-7.7
24.0
11.8
11.9
33.3
23.3
23.4
0.2
24.8
24.6
19.0
12.5
12.6
16.7
6.9
7.0
77.7
1.8
2.2
-45.3
4.7
4.2
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
Total . . . . . . . . . . . . .
See footnote at end of table.
Table 5-26—Continued
Forest and fishery products: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
35.5
38,888.5
35.5
40,244.6
44.8
43,839.7
46.2
46,546.0
52.7
43,546.7
38,924.1
40,280.2
43,844.5
46,592.3
43,599.4
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
32.5
29,600.0
33.9
32,717.3
35.6
38,304.9
29.9
37,279.3
Total . . . . . . . . . . . . .
29,632.5
32,751.2
38,340.5
37,309.2
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
-13.7
9.8
4.3
10.5
5.0
17.1
-16.1
-2.7
18.9
4.3
(1)
3.5
26.0
8.9
3.2
6.2
14.0
-6.4
Total . . . . . . . . . . . . .
9.8
10.5
17.1
-2.7
4.3
3.5
9.0
6.2
-6.4
147.0
28,539.1
134.1
25,733.2
121.4
26,144.2
128.7
27,685.7
103.0
24,745.6
28,686.1
25,867.3
26,265.6
27,814.4
24,848.6
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
109.5
25,139.8
122.5
26,190.6
172.3
30,351.7
141.0
28,660.0
Total . . . . . . . . . . . . .
25,249.3
26,312.2
30,524.0
28,801.0
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.4
0.5
0.6
0.5
0.5
0.5
0.5
0.5
0.4
-14.0
-3.3
11.0
4.2
41.8
15.9
-18.2
-5.6
4.3
-0.4
-8.8
-9.8
-9.4
1.6
6.0
5.9
-20.0
-10.6
Total . . . . . . . . . . . . .
-3.3
4.2
16.0
-5.6
-0.4
-9.8
1.5
5.9
-10.7
1
Less than 0.5 percent.
253
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
to Israel remained small, rising from less than 0.1 percent in 1985 to 0.1
percent in 2001 As a share of total U.S. imports in this sector, imports from
Israel also remained small, and in fact fell from 0.5 percent in 1985 to 0.4
percent in 2001.
U.S.-Canada FTA
Between 1989 and 2001, U.S.-Canada trade in the forestry and fisheries
sector grew by almost $25 billion, or 213 percent, from $11.7 billion in 1989 to
$36.6 million in 2001 (table 5-27). Sector exports to Canada more than
doubled, from $3.2 billion to $7.4 billion, while imports almost tripled, from
$8.4 billion to $28.8 billion during the same period. As a share of total U.S.
sector exports, Canada grew from 14 percent in 1989 to 30 percent in 2001. Of
total U.S. sector imports, Canada’s share grew from 28 percent in 1989 to 66
percent in 2001. In both cases, much of the growth took place prior to 1995,
the first year of NAFTA (see below).
This agreement, like the others examined herein, has had a minimal impact
on this sector. U.S. tariffs on imports from Canada were already low (0.3
percent) prior to the agreement and are less than 0.1 percent today. The largest
non-demand-related factor affecting U.S.-Canada trade in this sector probably
was the Softwood Lumber Agreement, which, along with an earlier
Memorandum of Understanding negotiated by the two countries, was intended
to resolve a series of unfair trade complaints by the U.S. industry.234
NAFTA
From 1994 to 2001, U.S. sector trade with its NAFTA partners nearly
doubled, from $25.9 billion in the former year to $48.5 billion in the latter.
U.S. imports from NAFTA partners grew by $20.0 billion, to $37.2 billion by
2001, while exports to NAFTA partners rose by $2.6 billion, to $11.3 billion,
leaving a trade deficit of nearly $26 billion in 2001. As a share of total U.S.
sector imports, NAFTA partners supplied 85 percent in 2001, up from 53
percent in 1994. As a share of total U.S. sector exports, NAFTA partners’
markets accounted for 44 percent in 2001, up from 32 percent in 1994.
NAFTA’s provisions affecting this sector fall mainly in the categories of
tariffs, technical barriers, and customs valuation. However, none of these had
234 See, e.g., Softwood Lumber from Canada, inv. No. 701--TA--312, USITC Pub.
2469, Dec. 1991, pp. A--3 to A--6. The MOU was signed on Dec. 30, 1986, prior to
Commerce’s final determination in the countervailing--duty investigation that year.
Under this agreement, Canada agreed to charge an export tax to offset benefits accruing
to its lumber producers and exporters. However, on Sept. 9, 1991, Canada ended the
export tax, leading to the above--cited investigation (which was self--initiated by the
Department of Commerce). At the same time, USTR initiated a section 301
investigation. Both actions were terminated following bilateral discussions.
254
Table 5-27
Forest and fishery products: U.S. trade with Canada and Mexico, 1987-2001
Year
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1987
1988
1989
1990
1991
Millions of constant (1996) dollars
1992
1993
1994
7,885.1
4,786.0
16,848.9
29,520.1
7,646.9
3,813.1
19,124.5
30,584.5
8,444.5
5,041.0
17,001.7
30,487.2
10,802.4
6,005.3
11,324.3
28,132.0
10,848.2
5,165.9
9,779.2
25,793.3
10,847.0
5,001.4
11,143.9
26,992.3
11,538.2
5,052.8
13,041.5
29,632.5
12,003.1
5,210.8
15,537.2
32,751.2
26.7
16.2
25.0
12.5
27.7
16.5
38.4
21.4
42.1
20.0
40.2
18.5
38.9
17.1
36.7
15.9
—
—
—
—
-3.0
-20.3
13.5
3.6
10.4
32.2
-11.1
-0.3
27.9
19.1
-33.4
-7.7
0.4
-14.0
-13.6
-8.3
(1)
-3.2
14.0
4.7
6.4
1.0
17.0
9.8
4.0
3.1
19.1
10.5
5,137.1
1,786.7
18,141.1
25,064.9
5,310.4
2,233.1
18,573.8
26,117.3
5,420.7
2,289.2
17,539.4
25,249.3
5,775.6
2,634.1
17,902.4
26,312.2
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,669.3
939.4
12,738.8
16,347.5
3,054.3
1,253.4
16,067.9
20,375.6
3,185.2
1,471.4
18,275.6
22,932.2
4,957.6
1,495.2
18,077.3
24,530.0
16.3
5.8
15.0
6.2
13.9
6.4
20.2
6.1
20.5
7.1
20.3
8.6
21.5
9.1
22.0
10.0
—
—
—
—
14.4
33.4
26.1
24.6
4.3
17.4
13.7
12.6
55.7
1.6
-1.1
7.0
3.6
19.5
0.4
2.2
3.4
25.0
2.4
4.2
2.1
2.5
-5.6
-3.3
6.6
15.1
2.1
4.2
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
See footnote at end of table.
255
256
Table 5-27—Continued
Forest and fishery products: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,049.8
6,158.7
19,132.0
15,970.2
8,178.0
13,160.9
16,665.6
7,829.4
14,429.0
13,245.3
4,869.6
22,165.3
15,259.7
6,099.4
22,525.4
26,981.8
10,828.9
8,781.6
28,769.9
8,452.8
6,376.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,340.5
37,309.2
38,924.1
40,280.2
43,884.5
46,592.3
43,599.4
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34.0
16.1
42.8
21.9
42.8
20.1
32.9
12.1
34.8
13.9
57.9
23.2
66.0
19.4
8.7
18.2
23.1
22.4
32.8
-31.2
4.4
-4.3
9.6
-20.5
-37.8
53.6
15.2
25.3
1.6
76.8
77.5
-61.0
6.6
-21.9
-27.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.1
-2.7
4.3
3.5
9.0
6.2
-6.4
7,064.2
2,983.1
15,820.0
7,511.7
3,261.8
15,492.2
7,890.1
3,649.4
16,275.0
7,419.1
3,260.3
14,169.2
25,867.3
26,265.6
27,814.4
24,848.6
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,552.8
2,372.6
21,598.6
6,506.8
2,437.5
19,856.8
7,079.1
2,672.8
18,934.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,524.0
28,801.0
28,686.1
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
21.5
7.8
22.6
8.5
24.7
9.3
27.3
11.5
28.6
12.4
28.4
13.1
29.9
13.1
13.5
-9.9
20.7
16.0
-0.7
2.7
-8.1
-5.6
8.8
9.7
-4.7
-0.4
-0.2
11.6
-16.5
-9.8
6.3
9.3
-2.1
1.5
5.0
11.9
5.1
5.9
-6.0
-10.7
-12.9
-10.7
Less than 0.5 percent.
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
much real effect on U.S. trade with NAFTA partners. U.S. tariffs on NAFTA
imports in this sector averaged 0.1 percent ad valorem before the agreement
and less than 0.1 percent after. About 75 percent of NAFTA trade in this
sector is between the United States and Canada, where, as noted above, trade
disputes have been addressed in other fora besides NAFTA.
Uruguay Round
U.S. trade in the forestry and fishery products sector increased from $69.3
billion in 1995, the year the Uruguay Round Agreements were implemented, to
$75 billion in 2000, before returning to its 1995 level in 2001. Sector imports
during this period grew from $38.3 billion in 1995 to a record $46.6 billion in
2000, before falling to $43.6 billion in 2001. Sector exports during the same
period fell from $31.0 billion in 1995 to $28.8 billion in 2000, and further to
$25.8 billion in 2001. Industry shipments rose from $486.9 billion in 1995 to
$494.4 billion in 2000, an increase of $7.5 billion, or 2 percent. They then
dropped to $452.6 billion in 2001.
The Uruguay Round Agreements addressed a variety of issues, including
tariffs, which as noted above were already quite low. The average U.S. tariff in
this sector was 0.5 percent ad valorem prior to the Agreements and 0.3 percent
by 1999. Other issues addressed in the round included antidumping and
subsidies rules, technical barriers, and customs valuation, among other topics.
However, none of these appear to have had any appreciable effects on this
sector. Rather, the greatest impacts on U.S. production and trade come about
from macroeconomic events such as recessions and currency fluctuations. The
Asian financial crisis, for example, or the 1981 and 2001 U.S. recessions, along
with the recent strong U.S. dollar (especially vis-à-vis currencies of major
competing sector exporters) most likely have had much greater influence on
U.S. trade in this sector than the Uruguay Round Agreements.235
Views of Interested Parties
American Forest & Paper Association 236
American Forest and Paper Association (AF&PA) is the national trade
association of the forest, pulp, paper, paperboard, and wood products industry.
In its view, tariffs are the principal factor impairing the competitiveness of the
235
This is also because the Agreements had no connection to the Softwood Lumber
Agreement or any other bilateral negotiations on that issue.
236 Jacob Handelsman, Senior Director, International Trade, and Elizabeth Ward,
Executive Director, Wood Products International, American Forest & Paper Association,
written submission to the Commission, Mar. 31, 2003.
257
U.S. forest products industry, and it believes that “no progress has been made
on multilateral tariff elimination in the wood products sector and only partial
progress has been achieved in the paper sector.” Regional FTAs to which the
United States is not a party have only exacerbated the competitiveness
problem by shutting out the U.S. industry from those markets. Besides tariffs,
foreign sanitary and phytosanitary (SPS) measures and producer subsides also
create significant U.S. competitive disadvantages for this sector. In general,
U.S. exports have fallen in recent years, according to the AF&PA, because of
the downturn in the Japanese housing market, the strong U.S. dollar, and
other macroeconomic factors.
Tokyo and Uruguay Rounds
These Rounds led to declines or elimination of U.S. tariffs in this sector
without corresponding cuts by trading partners, “locking in” a U.S. competitive
disadvantage. In particular, the failure to achieve “zero-for-zero” cuts in wood
products tariffs with Japan has put the U.S. industry at a disadvantage.
Developing countries also have not liberalized their markets or industries, to
the detriment of the U.S. industry. Subsidies in both developing and developed
economies abroad continue to create competition for U.S. exports. SPS
disciplines negotiated in the Uruguay Round are important to the industry and
AF&PA opposes any attempt to evade such disciplines, such as attempts by the
EU to block U.S. trade with SPS measures based on other than scientific
grounds.
NAFTA
Mexico is an important market for U.S. wood products, because there is
limited domestic production in Mexico. However, the lengthy staging-in period
for Mexican tariff reduction has limited U.S. exports below what they might
otherwise have been. The strong dollar vis-a-vis competing exporters in
low-cost countries has also hurt U.S. export potential in Mexico. On the other
hand, U.S. paper product exports to Mexico have been “thriving.”
United States Tuna Foundation 237
The United States Tuna Foundation (USTF) is a trade association
representing all U.S. canned tuna processors and tuna boat owners. USTF has
consistently opposed inclusion of canned tuna in the trade agreements
examined in this report. USTF notes that several ITC reports have described
the “import sensitive” nature of the product, as well as the decline of the U.S.
industry due to imports.
237
Randi Parks Thomas, United States Tuna Foundation, written submission to the
Commission, Mar. 31, 2003.
258
During the period under review, the canning sector has shrunk from 14
establishments to four, and employment has declined from more than 26,000 to
slightly more than 6,000 in 2002. All but one mainland-based establishment
have closed, and only three remain in American Samoa and Puerto Rico. In the
harvesting sector, the number of boats and employment thereon have similarly
declined. During the last ten years, imports of canned tuna have risen by 10
percent and imports of frozen tuna (which, along with frozen tuna delivered by
harvesting vessels, is used by canners to make canned tuna) have risen by 67
percent.
USTF notes that tariffs on canned tuna imports in other large markets
remain high, for example, the tariff is 24 percent ad valorem in the EU. Most
imports into both the United States and the EU come from low-wage countries
that, in many cases, already have duty preferences (e.g., GSP, ATPA), and
further declines in U.S. tariff protection for the industry would further weaken
the economic health of the canners and boats.
Energy and Fuels238
The United States is a major world producer and consumer of energy and
fuels as well as a large net importer. The United States accounts for only 9
percent of the world’s production but 26 percent of the world’s consumption of
crude petroleum; 24 percent of production and 26 percent of consumption of
refined petroleum products; 22 percent of production and 26 percent of
consumption of natural gas; and 21 percent of both production and
consumption of coal (table 5-28).239
The major economic, technological, and regulatory forces affecting this
sector are highly interdependent. As demand for petroleum and the availability
of low-cost supplies fluctuated during the past two decades, investment in
exploration and drilling services also fluctuated widely. The world crude
petroleum industry essentially recovers and distributes a finite, non-renewable
resource. Exploration and drilling is directly tied to the per-barrel price of
crude petroleum. As the price of crude petroleum increases, so does exploration
and drilling. Conversely, if the price is low, drilling in certain areas ceases.
The U.S. industries producing energy and fuels are the world’s leaders in
research and development of the sophisticated, high-tech processes and
equipment used to explore for and produce the products in this sector.
Technological innovations in the sector tend to concentrate on improving the
recovery of material from already discovered resources. Many of the U.S.
petroleum companies have developed expertise in this area and have applied it
in the development of reserves in other areas of the world. Specific
238 For the purposes of this investigation, the energy and fuels sector is composed of
SICs 12, 13, and 29, which include the production of coal, crude petroleum, natural gas,
and refined petroleum products.
239 Based on official statistics of the U.S. Department of Energy.
259
260
Table 5-28
Energy and fuel products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and
exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
464.0
68.4
12.9
519.5
-55.5
308.5
45.6
10.3
343.7
-35.3
309.4
53.2
9.6
353.0
-43.6
290.5
47.4
9.8
328.0
-37.5
307.1
61.1
11.7
356.5
-49.4
13.2
2.8
13.3
3.3
15.1
3.1
14.4
3.4
17.1
3.8
762
649
619
537
565
500
560
492
537
466
17.03
17.44
17.14
16.91
16.90
715
574
619
590
659
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
362.5
85.7
8.2
440.0
-77.5
465.3
112.2
11.1
566.4
-101.1
590.6
135.4
14.2
711.9
-121.2
648.5
126.0
16.3
758.2
-109.7
582.8
95.1
18.7
659.2
-76.4
Imports/apparent consumption . .
Exports/shipments . . . . . . . . . . . .
19.5
2.3
19.8
2.4
19.0
2.4
16.6
2.5
14.4
3.2
Total employment . . . . . . . . . . . . .
Production workers . . . . . . . . . .
847
607
684
680
758
717
906
806
909
805
Hourly earnings . . . . . . . . . . . . .
16.76
16.96
16.65
16.62
16.85
521.7
83.3
13.6
615.1
-69.7
508.2
79.9
12.5
575.5
-67.4
Percentage
13.5
2.5
13.9
2.5
1,000 workers
793
671
795
675
Constant (1996) dollars
17.19
16.98
$1,000 per worker
Labor productivity . . . . . . . . . . . . .
See footnote at end of table.
597
684
824
805
724
777
753
Table 5-28—Continued
Energy and fuel products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and
exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
302.4
71.1
12.1
361.4
-59.0
231.7
52.6
9.7
274.7
-43.0
271.4
64.3
9.4
326.2
-54.8
388.3
112.7
12.3
488.8
-100.4
366.4
101.6
10.6
457.4
-91.0
19.7
4.0
19.2
4.2
19.7
3.5
23.1
3.2
22.2
2.9
480
420
478
418
430
375
439
388
464
417
16.95
17.57
17.64
17.43
17.24
720
554
723
1,001
878
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . . . .
Trade balance . . . . . . . . . . . . . . . .
344.8
73.3
13.8
404.5
-59.6
304.2
59.7
13.8
350.3
-46.1
285.2
58.0
12.4
330.8
-45.6
271.4
57.4
10.5
318.3
-47.0
259.9
57.0
9.3
307.5
-47.6
Imports/apparent consumption . .
Exports/shipments . . . . . . . . . . . .
18.1
4.0
17.1
4.5
17.5
4.3
18.0
3.9
18.5
3.6
Total employment . . . . . . . . . . . . .
Production workers . . . . . . . . . .
552
483
553
471
510
434
501
413
486
407
Hourly earnings . . . . . . . . . . . . .
16.84
16.87
17.07
16.85
16.78
261.6
58.8
10.5
309.9
-48.3
307.0
73.5
12.1
368.4
-61.4
Percentage
19.0
4.0
19.9
3.9
1,000 workers
465
397
464
399
Constant (1996) dollars
16.82
16.67
$1,000 per worker
Labor productivity . . . . . . . . . . . . .
1
715
646
657
657
639
660
769
Includes SIC 12(coal mining), 13 (oil and gas extraction), and 29 (petroleum refining and related industries).
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics.
261
developments, such as horizontal drilling and the injection of certain
chemicals into wells, have increased considerably the amount of material that
can be recovered from wells that were at one time considered to be dry. In
addition, the United States maintains a sophisticated transportation system
consisting of pipelines, barges, railroads, and trucks to move product from
points of production to consuming areas.
There are about 19,000 to 20,000 companies involved in the production of
energy and fuels in the United States. Many are small companies that
individually and collectively account for relatively small shares of total U.S.
production of crude petroleum, refined petroleum products, natural gas, and
coal. There are also many large, multinational companies in the United States
that are involved in both foreign production and importing into the United
States. Most of these companies are also involved in refining and
petrochemical production. Approximately 50 of the largest companies account
for about 80 percent of total U.S. sector production. Employment in the U.S.
energy and fuels sector, which fluctuated during 1978-2001, decreased from
847,000 workers in 1978 to 464,000 in 2001, mainly due to the declines in
world prices for crude petroleum, technological advances, and the closure of
stripper wells.240
The value of U.S. shipments of energy and fuels fluctuated erratically from
$362.5 billion in 1978 to $366.4 billion in 2001, peaking at $648.5 billion in
1981 and reaching a low of $231.7 billion in 1998. Crude petroleum accounts
for an average of 13 percent of the value of shipments for the sector; refined
petroleum products accounts for 38 percent; natural gas accounts for
39 percent; and coal accounts for 10 percent. However, the price of crude
petroleum, which influences the quantity of production and shipments of these
products, fluctuated during 1978-2001 from a low of $9.00 per barrel in 1978
to a high of $28.26 per barrel in 2000 (in constant 1996 dollars).241
U.S. production of crude petroleum declined from 8.7 million barrels per
day (b/d) in 1978 to 5.8 b/d in 2001 as a result of many factors, most notably
declining world crude petroleum prices in the mid-1980s that resulted in the
reduced profitability of certain high cost U.S. stripper wells, many of which
were shut down. U.S. production declined each year during the period,
reaching its lowest point in 2000 and 2001. Natural gas production during the
period remained relatively stable at about 19.1 trillion cubic feet. Prices for
natural gas generally mirror crude petroleum prices—over 90 percent of U.S.
natural gas production is associated242 with the production of crude petroleum.
240 A stripper well is one which produces such small volumes of crude petroleum
that the gross income provides only a small margin of profit or, in some cases, does not
even cover the actual cost of production.
241 Based on official statistics of the U.S. Department of Energy.
242 Associated natural gas occurs in the form of a gas cap in a crude petroleum well.
The natural gas is separated from the crude petroleum at the wellhead and shipped via
pipelines to natural gas processing plants.
262
Natural gas prices (per thousand cubic feet), fluctuated from a low of $0.91
in 1978 to a high of $4.12 in 2001. Wellhead prices of natural gas increased
significantly in 2001, primarily because the supply in California was
inadequate to meet the demand of industrial users.243 U.S. production of
refined petroleum products, which accounts for an average of about 85 to 90
percent of domestic consumption, increased from 18.8 million barrels per day
(b/d) in 1978 to 19.6 million b/d in 2001. U.S. petroleum refineries, which
are designed to operate at 85 percent capacity utilization, are currently
operating at more than 95 percent, a level that cannot be sustained
indefinitely. U.S. production of coal increased from 670 million short tons in
1978 to 1.1 billion short tons in 2001, based on increased demand.244
The United States is a major world importer of energy and fuels. In terms
of quantity, the United States accounts for an average of 24 percent of the total
world’s imports of crude petroleum, which have accounted for more than 50
percent of domestic consumption since the mid 1990s. U.S. imports of crude
petroleum increased from 6.4 million b/d in 1978 to 9.8 million b/d in 2001.
Also, since the mid 1990s, the United States has accounted for an average of
17 percent of total world imports of natural gas,245 13 percent for refined
petroleum products, and 2 percent for coal. U.S. imports of natural gas
increased from 966 billion cubic feet in 1978 to 4.0 trillion cubic feet in 2001
and imports of refined petroleum products fluctuated but remained relatively
stable, increasing overall from 2.0 million b/d in 1978 to 2.5 million b/d in
2001. The United States is not a net importer of coal; however, U.S. imports
increased from 2.9 million short tons in 1978 to 19.8 million short tons in
2001, most of which were imports of coke from China.
Except for coal, the United States is not a major exporter of energy and
fuels, accounting for a minimal share of total world exports. The United States
has abundant coal reserves and is the world’s third largest supplier of coal
behind Australia and South Africa. The United States accounts for an average
of 11 percent of the world’s total coal exports. U.S. exports of crude petroleum
account for less than 0.5 percent of total world exports, natural gas accounts
for 0.8 percent, and refined petroleum products account for less than 5 percent.
U.S. exports of crude petroleum are prohibited, except as approved by the
243 On Mar. 26, 2003, the Federal Energy Regulatory Commission (FERC)
announced that its investigation into the California energy crisis found widespread
manipulation of natural gas and electricity prices and supplies in California.
244 Based on official statistics of the U.S. Department of Energy.
245 Natural gas is most efficiently and least expensively transported in its gaseous
state via pipeline, thus limiting import sources and export markets to those connected to
the intricate and sophisticated U.S. pipeline system, primarily Canada and, to a lesser
extent, Mexico. While the United States has the capability to liquify and transport
liquified natural gas (LNG) via tanker from ports on both the East and West Coast, many
foreign markets do not have LNG receiving terminals, which are highly sophisticated
and extremely expensive to build and maintain.
263
Government.246 Canada has been the only consistent market for U.S. exports
of crude petroleum as part of a commercial exchange agreement. U.S.
exports of crude petroleum ranged from a high of 287,000 b/d in 1980 to a
low of 20,000 b/d in 2001. The U.S. market consumes an average of
98 percent of the total U.S. production of refined petroleum products. U.S.
exports of refined petroleum products increased from 204,000 b/d in 1978 to
951,000 b/d in 2001. Approximately 99 percent of U.S. exports of natural
gas are shipped via pipeline in a gaseous state; exports of natural gas ranged
from a low of 49 billion cubic feet in 1980 to a high of 364 billion cubic
feet in 2001. U.S. exports of coal ranged from a low of 40.7 million short
tons in 1978 to a high of 112.5 million short tons in 1981.
Effect of Trade Agreements on the Sector
The five trade agreements that are the subject of this investigation have had
little, if any, direct effect on U.S. production and trade in this sector. Of the
products covered in this sector, both natural gas and coal were already duty
free, and duty rates for crude petroleum and refined petroleum products were
already very low, averaging less than 1 percent ad valorem prior to the Tokyo
Round. In addition, the duty rates for refined petroleum products are bound in
the GATT. Table 5-29 presents trade issues addressed by the subject trade
agreements that were relevant to the sector.
The primary driving force in the supply and demand of energy and fuels is
the per barrel price of crude petroleum. The crude petroleum market is global
with prices that are closely linked. U.S. crude petroleum prices are almost
identical to those in other producing and consuming nations, indicating that
prices are determined by world demand and supply. During 1978-2001, crude
petroleum price fluctuations were not generally affected by trade agreements
but were largely driven by market events.
The many unrelated events occurred that shocked prices during 1998
illustrate how market forces affect the sector. During the first quarter of 1998,
Asia entered into a period of economic crisis and, after two years of fairly
steady growth in demand for crude petroleum, world demand fell by 500,000
b/d, causing price drops of $3 to $5 per barrel. Compounding the Asian
economic crisis was the abnormally warm winter in the United States, Europe,
and Asia. As a result, by May, supply outpaced demand, stocks began to build,
246 U.S. exports are restricted to: (1) crude petroleum derived from fields under the
State waters of Alaska’s Cook Inlet; (2) Alaskan North Slope (ANS) crude; (3) certain
domestically produced crude destined to Canada as part of a commercial exchange
agreement; (4) production shipped from U.S. territories; and (5) small shipments of
California crude to Pacific Rim countries. U.S. exports of crude petroleum account for
less than 0.5 percent of total U.S. production and less than 2 percent of Cook Inlet and
ANS crude petroleum production.
264
Table 5-29
Energy and fuel products: Trade issues addressed in trade agreements and U.S. tariffs
Trade issues and U.S. tariffs
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
(1979) 0.1%
(1987) 0.6%
(1984) NA
(1995) NA
(1987) 0.5%
(1998) <0.1%
(1994) 0.6%
(1999) 0.4%
(1993) 0.2%
(2001) <0.1%
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Import licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Customs valuation . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Government procurement . . . . . . . . . . . . . . . . . . . .
X
X
X
Offsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Rules of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
X
X
1
2
The NAFTA provides that tariffs be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2008 for all other goods.
Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the world
during the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates in
parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative,
Trade Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
265
and prices declined by approximately $6 per barrel.247 Prices had returned to
an average of $15 per barrel by August when Russia increased crude
petroleum exports to the world market in an effort to earn dollars and offset
losses from the depreciating ruble. At the same time, the Chinese
government, in an effort to preserve hard currency and encourage economic
growth, drastically reduced fourth quarter imports.248 These events in Russia
and China had the effect of increasing supply by 600,000 to 800,000 b/d. In
addition, the United Nations allowed Iraq to export $2 billion of crude
petroleum every six months for humanitarian reasons, which resulted in
additional price declines.249 All trade agreements enacted during 1978-2001
were overshadowed by events such as those occurring during 1998, which
determined price and demand for energy and fuels. There was little or no
direct impact on petroleum trade as a result of the Tokyo Round and the
U.S.-Israel FTA. Rates of duty for crude petroleum and refined petroleum
products were already very low prior to the entry into force of these
agreements. In addition, Israel accounted for a very small share of total
sector trade (table 5-30).
U.S.-Canada FTA
There was little or no direct impact on petroleum trade as a result of the
United States-Canada FTA. Under the United States-Canada FTA, Canada
remained the only market for U.S. exports of crude petroleum under a
commercial exchange agreement approved by the U.S. Government, whereby
U.S. exports of crude are exchanged for imports of refined petroleum products.
In addition, a sophisticated pipeline system connects the United States and
Canada. Many of the large multinational petroleum companies in the United
States also maintain operations in Canada, frequently shipping feedstocks and
products between their plants in the two countries.
NAFTA
Table 5-31 provides data on U.S. sector trade with Canada and Mexico.
There was little or no direct impact on petroleum trade as a result of the
NAFTA, which reduced duty rates to free in 2003. The NAFTA reaffirmed the
provisions of the U.S.-Canada FTA in terms of petroleum (crude petroleum and
refined petroleum products). The United States is Mexico’s major trading
partner, accounting for 60 percent of Mexico’s exports of crude petroleum. The
United States is the major source of Mexico’s imports of refined petroleum
products; Mexico’s nine operating refineries cannot meet domestic demand for
refined petroleum products. Mexican trade with Canada in petroleum is
247
Based on official statistics of the U.S. Department of Energy.
Industry representative, interview with USITC staff, Nov. 20, 2002.
249 Industry representative, interview with USITC staff, Nov. 20, 2002.
248
266
Table 5-30
Energy and fuel products: U.S. trade with Israel, 1984-2001
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
37.6
47,333.0
16.6
61,070.4
34.6
73,278.3
29.9
59,696.2
21.6
57,968.1
47,370.6
61,087.0
73,313.0
59,726.0
57,989.7
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
(1)
79,908.0
28.4
68,317.7
39.2
45,511.2
34.0
53,204.1
Total . . . . . . . . . . . . .
79,908.0
68,346.1
45,550.4
43,238.2
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
(2)
(2)
0.1
0.1
0.1
(2)
0.1
0.1
(2)
—
—
(1)
-14.5
38.1
-33.4
-13.3
16.9
10.4
-11.0
-55.8
29.0
108.7
20.0
-13.8
-18.5
-27.7
-2.9
Total . . . . . . . . . . . . .
—
-14.5
-33.4
16.9
-11.0
29.0
20.0
-18.5
-2.9
29.7
9,809.7
61.4
11,599.4
87.9
13,603.8
74.0
13,605.1
56.4
12,292.3
9,839.4
11,660.8
13,691.7
13,679.1
12,348.7
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
20.2
12,518.8
29.1
12,822.3
23.0
10,250.8
14.1
9,611.0
Total . . . . . . . . . . . . .
12,539.0
12,851.4
10,273.8
9,625.0
Percent
267
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.2
0.2
0.2
0.2
0.3
0.5
0.6
0.5
0.5
—
—
43.7
2.4
-21.0
-20.1
-38.8
-6.2
111.0
2.1
107.1
18.2
43.2
17.3
-15.9
(1)
-23.8
-9.7
Total . . . . . . . . . . . . .
—
2.5
-20.1
-6.3
2.2
18.5
17.4
0.1
-9.7
See footnotes at end of table.
268
Table 5-30—Continued
Energy and fuel products: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
6.3
71,044.6
6.8
52,602.7
3.1
64,259.8
44.6
112,669.4
13.4
101,572.4
71,050.9
52,609.4
64,262.8
112,714.0
101,585.6
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
35.5
57,376.3
22.5
56,931.6
0.4
58,831.3
2.8
73,466.1
Total . . . . . . . . . . . . . .
57,411.8
56,954.1
58,831.8
73,468.9
Percent
Israel/Total . . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
0.1
(2)
(2)
(2)
(2)
(2)
(2)
(2)
(2)
64.5
-1.0
-36.7
-0.8
-98.2
3.3
580.3
24.9
120.5
-3.3
8.0
-26.0
-54.7
22.2
135.7
75.3
-69.9
-9.9
Total . . . . . . . . . . . . . .
-1.0
-0.8
3.3
24.9
-3.3
-26.0
22.2
75.3
-9.9
78.2
11,989.5
85.3
9,560.3
96.5
9,346.8
76.0
12,199.3
91.9
10,489.9
12,067.6
9,645.5
9,443.3
12,275.2
10,581.8
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
76.7
10,387.3
85.8
9,229.9
105.8
10,408.8
115.6
11,933.0
Total . . . . . . . . . . . . . .
10,464.0
9,315.7
10,514.7
12,048.7
Percent
Israel/Total . . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
0.7
0.9
1.0
1.0
0.7
0.9
1.0
0.6
0.9
35.9
-15.5
11.8
-11.1
23.4
12.8
9.2
14.6
-32.4
0.5
9.0
-20.3
13.2
-2.2
-21.3
30.5
21.0
-14.0
Total . . . . . . . . . . . . . .
-15.3
-11.0
12.9
14.6
0.2
-20.7
-2.1
30.0
-13.8
1
2
Not available
Less than 0.5 percent.
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
Table 5-31
Energy and fuel products: U.S. trade with Canada and Mexico, 1987-2001
Year
1987
1988
1989
1990
1991
1992
1993
1994
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,885.1
4,786.0
40,567.0
7,906.1
3,942.4
35,522.1
9,063.9
5,410.7
46,612.4
12,045.8
6,696.6
54,570.6
12,537.4
5,970.3
41,218.4
12,840.8
5,920.7
39,228.2
13,987.7
6,125.5
37,298.6
14,854.6
6,448.7
35,650.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53,238.2
47,370.6
61,087.0
73,313.0
59,726.0
57,989.7
57,411.8
56,954.1
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.8
9.0
16.7
8.3
14.8
8.9
16.4
9.1
21.0
10.0
22.1
10.2
24.4
10.7
26.1
11.3
—
—
0.3
-17.6
14.6
37.2
32.9
23.8
4.1
-10.9
2.4
-0.8
8.9
3.5
6.2
5.3
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
-12.4
31.2
17.1
-24.5
-4.8
-4.9
-4.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
-11.0
29.0
20.0
-18.5
-2.9
-1.0
-0.8
1,434.7
1,356.6
1,239.5
1,103.8
1,276.3
1,036.3
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,590.5
505.7
1,552.8
416.4
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,528.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,625.0
1,801.9
806.4
2,021.1
910.0
1,389.9
945.0
7,870.2
9,052.4
10,760.5
11,344.2
9,557.4
8,120.8
7,003.0
9,839.4
11,660.8
13,691.7
13,679.1
12,348.7
10,464.0
9,315.7
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
16.5
5.3
15.8
4.2
15.5
6.9
14.8
6.7
10.2
6.9
11.6
11.0
11.9
10.6
13.7
11.1
—
—
—
-2.4
-17.7
4.5
16.1
93.7
15.0
12.2
12.9
18.9
-31.2
3.8
5.4
3.2
43.6
-15.8
-13.6
-18.6
-15.0
3.0
-6.1
-13.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2.2
-6.3
2.2
18.5
17.4
0.1
-9.7
See note at end of table.
269
270
Table 5-31—Continued
Energy and fuel products: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
17,619.4
6,477.8
28,512.2
20,592.1
8,230.8
35,439.9
37,175.7
14,920.1
60,618.3
40,751.7
11,973.2
48,860.6
52,609.4
64,262.8
112,714.0
101,585.6
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,501.5
7,787.7
34,542.5
20,585.5
10,541.4
42,342.0
21,900.7
10,288.9
38,861.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,831.8
73,468.9
71,050.9
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.1
13.2
28.0
14.4
30.8
14.5
33.5
12.3
32.0
12.8
33.0
13.2
40.1
11.8
11.1
20.8
24.8
35.4
6.4
-2.4
-19.6
-37.0
16.9
27.1
80.5
81.3
9.6
-19.8
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-3.1
22.6
-8.2
-26.6
24.3
71.1
-19.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.3
24.9
-3.3
-26.0
22.2
75.4
-9.9
2,112.3
1,692.0
5,841.3
1,920.4
2,153.8
5,369.1
2,201.2
3,974.1
6,099.9
2,197.8
2,933.3
5,450.6
9,645.5
9,443.3
12,275.2
10,581.8
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,331.4
1,261.6
7,921.7
1,733.4
1,493.8
8,821.4
2,076.9
1,924.0
8,066.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,514.7
12,048.7
12,067.6
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.7
12.0
14.4
12.4
17.2
15.9
21.9
17.5
20.3
22.8
17.9
32.4
20.8
27.7
4.3
21.7
13.1
30.2
18.4
11.4
19.8
28.8
-8.6
1.7
-12.1
-27.6
-9.1
27.3
-8.1
14.6
84.5
13.6
-0.2
-26.2
-10.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-15.3
-11.0
12.9
14.6
0.2
-20.7
-2.1
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
negligible because of the lack of pipeline infrastructure between the two
nations; Mexico does export small quantities of crude petroleum to Canada
via tanker. Both countries are net petroleum exporters.
All segments of Mexico’s petroleum industry including the operations of
tankers and pipelines, and trade of crude petroleum, natural gas, and refined
petroleum products as well as oilfield services) remained under the sole
purview of the Mexican state-owned Petroleos Mexicanos (PEMEX). The
NAFTA includes provisions that ensure the ability of a nation to protect its
natural resources for reasons of national security. Crude petroleum is a national
security item, in accordance with the GATT.
Under the provisions of NAFTA, duty rates in the United States and
Canada for crude petroleum and refined petroleum products, which averaged
about 0.5 percent ad valorem for crude petroleum and about 1 percent for
refined petroleum products, were reduced to free over a 10-year period.
Mexico’s tariffs, which averaged about 5 percent ad valorem on crude
petroleum and 8.6 percent ad valorem on refined petroleum products, were
reduced to free over the same 10-year period. Canada and the United States
have historically maintained a trade relationship exchanging crude for products.
In Mexico, only PEMEX can import crude petroleum and refined petroleum
products; PEMEX has historically imported these products as they deem
necessary, regardless of tariff rates.
Uruguay Round
There was little or no direct impact on energy and fuels trade as a result of
the Uruguay Round Agreements. Crude petroleum and refined petroleum
products were are not subject to further scheduled Normal Tariff Relations
staged tariff reductions. The rates of duty for crude petroleum and refined
petroleum products were already very low.
Miscellaneous Products250
Overview
The miscellaneous products sector contains diverse industries that produce
a wide variety of products, ranging from high-technology medical equipment to
relatively low-technology products such as footwear. The sector encompasses
dynamic high-technology industries that have become global leaders, industries
that have maintained a relatively stable U.S. market share by successfully
250
For the purposes of this investigation, miscellaneous products are composed of
SIC groups 25, 31, 38, and 39. This sector includes search, detection, navigation,
guidance, aeronautical, and nautical systems and instruments for the entire period
(1978--2001).
271
adapting to import competition, and labor-intensive industries that have lost
most of the U.S. market to lower-priced imports. The miscellaneous products
sector is primarily composed of the following subsectors: medical goods,
which accounted for 23 percent of the total value of sector shipments in
2001; furniture, 22 percent; optical, measuring, and controlling instruments,
18 percent; and search, detection, navigation, guidance, and aeronautical
instruments, 10 percent.
Most U.S.-produced medical goods, measuring instruments, and
navigation/aeronautical instruments subsectors are high technology goods sold
primarily
to
medical
and
research
institutions,
manufacturing
equipment/process control firms, defense-related contractors, security firms,
and ship and aircraft producers. Although price is an important factor in world
competition, quality considerations are paramount. U.S. producers, noted for
their rigid quality standards, have a strong position in global markets.
Manufacturers in Europe and Japan are the chief competitors for U.S.
producers. Leading producers, based in the United States and Japan, are
seeking ways to reduce prices, including shifting assembly to countries with
lower labor costs. Many, if not most, of the U.S. industries in this sector are
globally competitive. The United States had trade surpluses in navigation
instruments and remote control apparatus; medical goods; drawing, drafting,
and calculating instruments; and measuring testing, and controlling instruments
in 2001.251
U.S. producers’ shipments in the sector grew by 49 percent during
1978-2001 to $279 billion (table 5-32).252 During the same period, sector
employment fell by 16 percent to 1.8 million workers, productivity grew 32
percent to $248,000 per worker, and hourly earnings increased by 8 percent to
$11.91. The most dynamic segment of the miscellaneous products sector is the
medical goods industry. U.S. producers’ shipments more than quadrupled
during 1978-2001 to $63.6 billion. Two factors have been key to the industry’s
growth: breakthroughs in science and technology, which have led to the
development of equipment such as magnetic resonance imaging (MRI)
machines and the increased need for medical equipment to service the aging
U.S. population.
U.S. producers’ shipments of furniture grew by 48 percent during
1978-2001 to $60 billion. The market is highly sensitive to changes in interest
rates, which affect home purchases, and therefore, furniture sales. U.S.-made
furniture, for the most part, is not competitive outside North America. U.S.
furniture producers have responded to import competition by using imported
251 U.S. trade in the industry/commodity group “Optical goods, including
ophthalmic instruments” is dominated by imports of eyeglass frames, which are not
classified in SIC 38. Therefore, the trade deficit and high import penetration ratio in this
category is not indicative of the competitiveness of U.S. producers of ophthalmic
instruments.
252 In constant (1996) dollars.
272
Table 5-32
Miscellaneous products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and
exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
214.8
44.3
19.0
240.1
-25.3
219.3
51.5
19.9
250.9
-31.6
227.8
56.8
22.3
262.3
-34.5
249.4
60.9
26.6
283.7
-34.3
251.1
59.4
29.4
281.2
-30.1
16.9
9.3
18.4
8.9
20.5
9.1
21.7
9.8
21.5
10.7
21.1
11.7
2,098
(2)
2,069
(2)
2,026
(2)
2,039
(2)
2,083
1,326
2,069
1,319
(2)
(2)
(2)
11.01
10.94
(2)
(2)
(2)
188
190
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . . .
Trade balance . . . . . . . . . . . . . .
187.8
26.1
18.5
195.4
-7.6
192.7
26.6
21.3
198.1
-5.4
199.4
26.8
23.1
203.1
-3.6
199.5
29.0
23.3
205.2
-5.7
197.4
29.0
21.2
205.2
-7.9
210.0
32.9
20.7
222.2
-12.2
212.7
39.4
19.7
232.4
-19.7
Percentage
Imports/apparent
consumption . . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . . .
13.4
9.9
13.4
11.0
13.2
11.6
14.2
11.7
14.1
10.7
Total employment . . . . . . . . . . .
Production workers . . . . . . . .
2,154
(2)
2,195
(2)
2,139
(2)
2,152
(2)
2,046
(2)
Hourly earnings . . . . . . . . . . .
(2)
(2)
(2)
(2)
(2)
14.8
9.9
1,000 workers
2,013
(2)
Constant (1996) dollars
(2)
(2)
$1,000 per worker
Productivity . . . . . . . . . . . . . . . .
See footnotes at end of table.
(2)
(2)
(2)
(2)
(2)
(2)
(2)
273
274
Table 5-32—Continued
Miscellaneous products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption and
exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
273.0
91.8
48.9
315.9
-43.0
278.2
98.1
48.2
328.0
-49.8
281.3
104.5
49.6
336.2
-54.9
285.6
116.0
57.3
344.3
-58.6
279.0
110.0
54.2
334.8
-55.9
29.1
17.9
29.9
17.3
31.1
17.6
33.7
20.1
32.9
19.4
1,860
1,177
1,885
1,198
1,872
1,195
1,864
1,190
1,799
1,125
11.33
11.50
11.66
11.78
11.91
232
232
235
240
248
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . .
Trade balance . . . . . . . . . . . . .
251.4
60.6
31.5
280.5
-29.1
245.5
60.0
33.9
271.6
-26.1
248.1
64.7
35.9
276.9
-28.8
251.5
69.4
36.5
284.4
-32.8
252.4
74.7
38.5
288.7
-36.2
259.1
79.6
41.3
297.4
-38.3
264.6
83.3
44.4
303.5
-38.9
Percentage
Imports/ apparent
consumption . . . . . . . . . . . . . .
Exports/shipments . . . . . . . . .
21.6
12.5
22.1
13.8
23.4
14.5
24.4
14.5
25.9
15.2
26.8
15.9
Total employment . . . . . . . . . .
Production workers . . . . . . .
2,020
1,280
1,938
1,215
1,894
1,195
1,878
1,188
1,868
1,188
1,848
1,178
Hourly earnings . . . . . . . . . .
10.96
10.91
10.90
10.91
10.93
27.5
16.8
1,000 workers
1,843
1,169
Constant (1996) dollars
10.99
11.17
$1,000 per worker
Productivity . . . . . . . . . . . . . . .
196
202
208
212
212
220
226
1
Includes SIC 25 (furniture and fixtures), 31 (leather and leather products), 38 (measuring, analyzing, and controlling instruments; photographic, medical and optical
goods; watches and clocks), and 39 (miscellaneous manufacturing industries).
2 Not available.
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics.
furniture to supplement their product lines and by importing labor-intensive
parts and hardware from China. Import penetration in the U.S. furniture
industry depends on the materials from which a given type of furniture is
made and its end-use. Office furniture tends to be manufactured from metals,
plastics, and man-made fibers and is characterized by greater standardization,
automation, and longer production runs than for wood household or
upholstered furniture. The weight and bulk of metal, upholstered furniture
and fully-assembled wood furniture result in shipping costs that discouraged
imports of these products from sources other than Canada. China, however, is
highly competitive in U.S. markets for stackable furniture, knock-down
furniture, and parts of furniture that require labor intensive processing, such
as lathe-work on legs for tables and chairs.253 Although the U.S. trade deficit
in the furniture industry amounted to $12.2 billion in 2001, imports
accounted for only 19 percent of U.S. apparent consumption.
The subsector producing optical, measuring, analyzing, and controlling
instruments has also expanded steadily throughout the period with U.S.
producers’ shipments more than doubling during 1978-2001 to $49.3 billion.
Almost every modern assembly line uses such equipment. This equipment is
also used for quality control in manufacturing, for testing in scientific and
medical laboratories, for checkout counters in retail stores, and in power plants
and other utilities to measure and control the flow of electricity, water, natural
gas, and petroleum. Although U.S. production has increased, less
technologically advanced products in this segment such as thermostats,
speedometers, and gas meters face intense import competition. This situation
has led U.S. producers to use assembly plants in Mexico to lower their
production costs for these products.
Cameras and watches are primarily labor and technology-intensive
consumer products. Companies based in Japan (with assembly plants in many
Asian countries) are the leading world producers of cameras and watches,
while manufacturers in Switzerland also remain significant global suppliers of
watches. U.S. producers have become niche suppliers of these products and the
U.S. market relies on foreign suppliers to meet a significant share of domestic
demand. The U.S. trade deficit for photographic cameras and equipment and
watches and clocks combined was more that $4.5 billion in 2001, and the ratio
of U.S. imports to apparent U.S. consumption for watches and clocks was 80
percent.
Most U.S. producers of the remaining sector products are globally
competitive only in the high-end niches. Production processes for most other
goods in this segment tend to be labor-intensive and production technology is
253
Taiwan was the leading supplier of such products to the U.S. market until the
mid--1980s. As labor costs rose in Taiwan, furniture manufacturers there shifted much of
their production to China. See USITC, Industry and Trade Summary: Furniture and
Motor Vehicle Seats, USITC Pub. 3382, Jan. 2001.
275
readily transferable to developing or newly industrialized countries.
Numerous sector imports are produced in Asia under license from U.S.
companies, and tend to be concentrated in consumer goods for which there is
no remaining U.S. production (e.g., home video games and certain Christmas
decorations). Such products typically require semi-skilled assembly (e.g.,
jewelry and musical instruments) or sewing (e.g., baseballs, sports gloves,
leather footwear, and luggage) or low-technology injection molding (e.g., toys
and dolls). Less import-sensitive articles are characterized by high
transportation costs; low raw-material costs in the United States relative to
those of foreign producers; or superior U.S. design and production
technology or copyright protection.
Effect of Trade Agreements on the Sector
The five trade agreements that are the subject of this investigation likely
have had little direct effect on overall production and trade in the U.S.
miscellaneous products sector. However, some subsectors were impacted by
tariff reductions as imports increased significantly.254 The growth in shipments
and trade that has taken place in the miscellaneous products sector since 1978
can be attributed principally to innovations in science and technology that have
aided the aggressive, high-tech industries making up the bulk of this sector.255
For example, the medical goods industry, which accounted for nearly
one-fourth of U.S. producers’ shipments in this sector in 2001, has consistently
retained competitiveness over the last decade due to its research and
development pipeline of new product introductions and adaptations.256 Other
factors contributing to sector expansion include very strong growth in demand;
adapting to import competition with increased production sharing;257 reputation
for high standards; and ability to provide customized products. Further, U.S.
companies increasingly took advantage of lower wage rates in Mexico and the
Dominican Republic by moving assembly of high volume but low margin
commodities to these countries.
254
Segments in the miscellaneous products industry that have been impacted by
increased U.S. imports in part attributed to relatively large tariff reductions include
certain furniture, leather and leather products. Tariff reductions were also relatively large
in other industries (SIC group 39), including specific costume jewelry, toys, and athletic
goods.
255 Measuring, analyzing, and controlling instruments; photographic, medical, and
optical instruments; and watches and clocks accounted for almost 60 percent of the total
value of U.S. producers’ shipments in this sector in 2001.
256 Products introduced or adapted during the past decade include advanced medical
imaging equipment, cardiac pacemakers and defibrillators, coronary stents, arthroscopic
and other endoscopic surgical apparatus and tools, orthopedic reconstructive implants,
medical lasers, and insulin imaging systems.
257 For additional detail see “Production--Sharing Update: Developments in 2001,”
Industry Trade and Technology Review, USITC Pub. 3534, July 2002, pp. 27--42 (posted
on USITC Internet site at www.usitc.gov/webpubs.htm).
276
Other sector products, such as footwear, luggage, and watches, have been
exempted from preferential tariff programs such as GSP, CBERA, and ATPA,
and tariffs have been reduced gradually. Despite tariff protection, the U.S.
industries manufacturing these products have, for the most part, disappeared.
Low labor costs in China have more than offset U.S. tariffs for these
labor-intensive products. China’s eligibility for MFN treatment, effected
January 30, 1980, was another factor influencing trade in this sector. China, the
principal beneficiary of tariff reductions on many categories of sector products
(i.e., furniture), has become an increasingly important supplier of certain
miscellaneous products. Table 5-33 presents trade issues addressed by the
subject trade agreements that were relevant to the sector.
Tokyo Round
Between 1980 and 2000, total U.S. trade in miscellaneous products
increased by 246 percent, reaching $173 billion before declining by 5 percent
in 2001. Imports of miscellaneous products increased almost yearly during
1980-2001, quadrupling to $110 billion, while exports of sector items more
than doubled during the same period to $54 billion causing the sector trade
deficit to increase from $3.7 billion to $56 billion. As the sector responded to a
globalized economy and production sharing became a major force in trading,
imports as a share of U.S. apparent consumption increased from 13 percent to
34 percent while exports as a share of shipments increased from 12 percent to
19 percent.
The effect of the Tokyo Round on the miscellaneous products industry was
limited. U.S. tariffs on sector products were relatively low prior to the
agreements and tariffs in major foreign markets on the majority of sector
products were also low.258 Tariffs259 were reduced by 3.1 percentage points to
4.7 percent during the period. The growth in international trade is primarily
attributable to technological advances and improvements in production
methods.
U.S.-Israel FTA260
Total U.S. trade in miscellaneous products with Israel more than
quadrupled during 1985-2001, from $1.7 billion to $6.7 billion. Trade with
Israel increased from 3 percent of total U.S. sector trade to 4 percent during the
same period. U.S. imports of sector products from Israel increased from $1.5
billion in 1985 to $5.7 billion in 2001, while U.S. exports increased from $358
million to nearly $1 billion (table 5-34).
258 There were important exceptions to this general observation. Relatively high
tariffs were maintained on luggage, leather footwear, watches, and toys through the
Tokyo Round.
259 Average trade--weighted ad valorem or ad valorem equivalent tariff.
260 The U.S.--Israel FTA was signed in 1985 and was fully implemented on Jan. 1,
1995.
277
278
Table 5-33
Miscellaneous products: Trade issues addressed in trade agreements and U.S. tariffs
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1979) 7.8%
(1987) 4.7%
(1984) <0.1%
(1995) <0.1%
(1987) 3.0%
(1998) <0.1%
(1994) 4.8%
(1999) 2.5%
(1993) 1.2%
(2001) <0.1%
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
X
X
X
Trade issues and U.S. tariffs
Rules of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
2
The NAFTA provides that tariffs be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2008 for all other goods.
Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the world
during the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates in
parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative,
Trade Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
Table 5-34
Miscellaneous products: U.S. trade with Israel, 1984-2001
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
1,990.7
58,951.7
2,047.9
57,384.0
1,853.3
58,728.1
1,861.6
58,112.4
1,980.7
62,736.3
60,942.4
59,432.0
60,581.3
59,973.9
64,717.0
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
1,318.2
38,053.2
1,488.5
42,791.5
1,699.0
49,767.5
1,792.4
54,994.3
Total . . . . . . . . . . . . .
39,371.3
44,280.0
51,466.5
56,786.8
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
3.4
3.4
3.3
3.2
3.3
3.5
3.1
3.1
3.1
—
—
12.9
12.5
14.1
16.3
5.5
10.5
11.1
7.2
2.9
-2.7
-9.5
2.3
0.5
-1.1
6.4
8.0
Total . . . . . . . . . . . . .
—
12.5
16.2
10.3
7.3
-2.5
1.9
-1.0
7.9
535.9
26,092.3
489.7
28,871.4
314.9
31,145.1
306.3
33,568.1
392.5
35,519.1
26,628.3
29,361.1
31,460.0
33,874.4
35,911.6
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
353.7
19,318.7
357.6
18,647.5
379.4
19,520.2
418.3
21,906.4
Total . . . . . . . . . . . . .
19,672.3
19,005.1
19,899.6
22,324.6
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
1.8
1.9
1.9
1.9
2.0
1.7
1.0
0.9
1.1
—
—
1.1
-3.5
6.1
4.7
10.2
12.2
28.1
19.1
-8.6
10.7
-35.7
7.9
-2.7
7.8
28.1
5.8
Total . . . . . . . . . . . . .
—
-3.4
4.7
12.2
19.3
10.3
7.2
7.7
6.0
See note at end of table.
279
280
Table 5-34—Continued
Miscellaneous products: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
3,749.7
88,050.7
4,460.4
93,597.0
5,121.6
99,370.3
6,138.8
109,828.4
5,680.7
104,354.0
91,800.4
98,057.4
104,492.0
115,967.2
110,034.7
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
2,292.6
67,059.9
2,597.0
72,117.4
2,824.7
76,785.2
3,194.6
80,147.6
Total . . . . . . . . . . . . .
69,352.5
74,714.3
79,609.8
83,342.2
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
3.3
3.5
3.6
3.8
4.1
4.6
4.9
5.3
5.2
15.8
6.7
13.3
7.5
8.8
6.5
13.1
4.4
17.4
9.9
19.0
6.3
14.8
6.2
19.9
10.5
-7.5
-5.0
Total . . . . . . . . . . . . .
7.2
7.7
6.6
4.7
10.2
6.8
6.6
11.0
-5.1
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
413.8
36,098.8
360.6
38,116.2
358.8
40,950.7
361.6
44,069.2
374.0
48,480.7
452.5
47,764.9
518.7
49,103.3
810.7
56,511.8
936.8
53,209.4
Total . . . . . . . . . . . . .
36,512.5
38,476.8
41,309.6
44,430.8
48,854.7
48,217.4
49,621.9
57,322.5
54,146.1
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
1.1
0.9
0.9
0.8
0.8
0.9
1.1
1.4
1.7
5.4
1.6
-12.9
5.6
-0.5
7.4
0.8
7.6
3.4
10.0
21.0
-1.5
14.6
2.8
56.3
15.1
15.6
-5.8
Total . . . . . . . . . . . . .
1.7
5.4
7.4
7.6
10.0
-1.3
2.9
15.5
-5.5
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
It is unlikely that the tariff reductions in theU.S-Israel FTA had any
measurable impact on the U.S. miscellaneous products industry because Israel
accounted for only a negligible share of U.S. trade in this sector. Moreover, a
large portion of these imported products already entered the United States
duty-free prior to 1985.
U.S.-Canada FTA
During 1988-2000, U.S. trade with Canada in miscellaneous products
nearly tripled, reaching $17.6 billion, before falling to $15.6 billion in 2001.
U.S. imports of these items from Canada increased irregularly during the
period to $7.1 billion in 2001, representing an increase of 135 percent over
1988; U.S. exports of sector products to Canada increased by 226 percent to
$8.6 billion (table 5-35). During the period under consideration, imports from
Canada accounted for 5 percent of total U.S. imports of miscellaneous products
in 1988, increasing to 6 percent in 2001; exports to Canada accounted for
12 percent of total U.S. exports in 1988, increasing to 16 percent in 2001.
Because Canada accounts for a relatively small share of U.S. trade in this
sector,261 it is unlikely that a tariff reduction of 2.9 percentage points to 0.1
percent262 had any measurable impact on the overall U.S. miscellaneous
products industry.
NAFTA
U.S. sector trade with NAFTA partners Mexico and Canada has increased
almost every year since the agreement entered into force in 1994 (table 5-35).
Between 1994 and 2001, U.S. imports from Canada increased 63 percent to
$7.1 billion (6 percent of total U.S. imports) and exports to Canada rose by 32
percent to $9.4 billion in 2000, before declining to $8.6 billion in 2001 (16
percent of total U.S. exports). Following a similar trend, U.S. imports from
Mexico more than doubled to $9.4 billion (9 percent of total U.S. imports);
exports to Mexico increased by 19 percent to $4.7 billion (9 percent of total
U.S. exports). Although much of the increase in sector trade with Mexico and
Canada can be attributed to factors discussed earlier,263 the elimination of
tariffs and nontariff barriers through this agreement–principally between the
United States and Mexico–has contributed to increased trade in certain
261 The most important exception to this general assessment was in the furniture
industry. U.S. furniture exports to Canada quadrupled during 1988--2000 as tariffs which
ranged between 2.5 percent and 9.6 percent ad valorem were reduced to free. Canada is
the leading market for U.S. exports of furniture.
262 Average trade--weighted ad valorem or ad valorem equivalent tariff.
263 The 50 percent devaluation of the Mexican peso in January 1995 was the leading
cause of the sharp rise in U.S. investment in assembly plants in Mexico in 1995 and 1996
and the subsequent increase in U.S. trade with Mexico.
281
282
Table 5-35
Miscellaneous products: U.S. trade with Canada and Mexico, 1987-2001
Year
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
1987
1988
1989
1990
1991
Millions of constant (1996) dollars
1992
1993
1994
2,864.3
1,537.0
52,385.4
56,786.8
2,999.5
1,941.9
56,001.1
60,942.4
2,862.0
2,218.3
54,351.7
59,432.0
2,855.2
2,376.8
55,349.4
60,581.3
2,782.3
2,563.0
54,628.7
59,973.9
3,147.2
2,972.5
58,597.4
64,717.0
3,498.9
3,473.4
62,380.2
69,352.5
4,325.4
4,407.4
65,981.5
74,714.3
5.0
2.7
4.9
3.2
4.8
3.7
4.7
3.9
4.6
4.3
4.9
4.6
5.1
5.0
5.8
5.9
—
—
—
—
4.7
26.3
6.9
7.3
-4.6
14.2
-3.0
-2.5
-0.2
7.1
1.8
1.9
-2.6
7.8
-1.3
7.3
13.1
16.0
7.3
7.9
11.2
16.9
6.5
7.2
23.6
26.9
5.6
7.7
5,570.2
2,842.5
25,461.7
33,874.4
5,922.6
3,381.1
26,607.9
35,911.6
6,421.6
3,450.5
26,640.5
36,512.5
7,177.6
3,565.9
27,733.3
38,476.8
Percent
Canada/Total . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
2,933.3
1,074.4
18,316.9
22,324.6
3,189.3
1,474.9
21,964.1
26,628.3
3,395.8
1,952.2
24,013.1
29,361.1
5,361.5
2,258.9
23,839.6
31,460.0
13.1
4.8
12.0
5.5
11.6
6.7
17.0
7.2
16.4
8.4
16.5
9.4
17.6
9.5
18.7
9.3
—
—
–
–
8.7
37.3
19.9
19.3
6.5
32.4
9.3
10.3
57.9
15.7
-0.7
7.2
3.9
25.8
6.8
7.7
6.3
19.0
4.5
6.0
8.4
2.1
0.1
1.7
11.8
3.4
4.1
5.4
Percent
Canada/Total . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . .
See note at end of table.
Table 5-35—Continued
Miscellaneous products: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
3,857.1
5,111.4
69,641.4
5,454.2
5,726.6
72,161.4
6,064.8
6,621.1
79,114.6
6,577.6
7,657.9
83,821.9
7,116.8
8,372.0
89,003.1
8,172.0
9,313.7
98,481.6
7,052.7
9,405.9
93,576.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
79,609.8
83,342.2
91,800.4
98,057.4
104,492.0
115,967.2
110,034.7
Canada/Total . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
6.1
6.4
6.5
6.9
6.6
7.2
6.7
7.8
6.8
8.0
7.1
8.0
6.4
8.6
12.3
16.0
5.6
12.3
12.0
3.6
11.2
15.6
9.6
8.5
15.7
6.0
8.2
9.3
6.2
14.8
11.3
10.7
-13.7
1.0
-5.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
6.6
4.7
10.2
6.8
6.6
11.0
-5.1
8,455.1
4,234.0
35,528.2
9,065.3
4,172.7
36,384.0
9,449.9
5,152.3
42,720.3
8,581.6
4,738.1
40,826.4
48,217.4
49,621.9
57,322.5
54,146.1
Percent
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
7,201.6
2,765.3
31,342.7
7,265.9
3,006.6
34,158.4
8,044.1
3,952.4
36,858.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . .
41,309.6
44,430.8
48,854.7
Percent
283
Canada/Total . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . .
17.4
6.7
16.4
6.8
16.5
8.1
17.5
8.8
18.3
8.4
16.5
9.0
15.9
8.8
0.3
-22.5
13.0
0.9
8.7
9.0
10.7
31.5
7.9
5.1
7.1
-3.6
7.2
-1.5
2.4
4.2
23.5
17.4
-9.2
-8.0
-4.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.4
7.6
10.0
-1.3
2.9
15.5
-5.5
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
industries.264 For example, although certain U.S. firms in this sector were
first attracted to Mexico as a manufacturing site due to its relatively lower
wage costs and proximity to the United States, they also benefitted from
Mexican investment incentives under its Maquiladora Program, preferential
U.S. production sharing duties, and eventually the reduction and elimination
of duties under NAFTA.
Uruguay Round
During 1995-2000, U.S. trade in miscellaneous products increased annually
to $173 billion, or by 43 percent, before declining by 5 percent in 2001 to $164
billion (table 5-35). Imports of miscellaneous products grew each year from
1995 to 2000, reaching $116 billion before declining to $110 billion in 2001.
Exports of such goods increased annually from $41 billion in 1995 to $57
billion in 2000, or by 39 percent, before decreasing to $54 billion in 2001.
During this period, U.S. shipments continued to grow, increasing from $250
billion in 1995 to $279 billion in 2000.
Although much of the increase in U.S. trade following the implementation
of the Uruguay Round can be attributed to the principal factors affecting the
sector’s expansion, the Uruguay Round nonetheless had a modest effect on
certain sectors of the industry. Tariffs were reduced by 2.3 percentage points to
2.5 percent.265 Under the Uruguay Round, the United States and several
important trading partners agreed to eliminate tariffs immediately for certain
sector products–medical goods, furniture, and dolls, toys, and games. The U.S.
medical instrument industry, a major world exporter, was in a strong position to
benefit from the removal of foreign tariffs. Many leading U.S. producers of
furniture import a portion of their product lines and/or labor-intensive parts so
the reduction in tariffs reduced their costs, making tariff elimination a mixed
blessing for some of the industry. Further, tariffs on imports of stackable and
knock-down furniture from China were already low, so reducing the tariffs did
not significantly impact the level of imports. The two largest marketers of toys,
dolls, and games own the most significant U.S. producers, although they supply
most of the U.S. market with products from wholly owned or contract
manufacturers in China. For certain products, both companies use assembly
facilities in Mexico and for others, it is more economical to supply the U.S.
market from domestic operations.
264 See Broom Corn Brooms, Inv. No. NAFTA 302--1 (Provisional Relief Phase),
USITC Pub. 2963 (May 1996); Broom Corn Brooms, Inv. Nos. TA--201--65 and NAFTA
302--1, USITC Pub. 2983 (Aug. 1996).
265 The average trade--weighted ad valorem or ad valorem equivalent tariffs.
284
Views of Interested Parties
American Brush Manufacturers Association 266
The American Brush Manufacturers Association (ABMA) is a diverse
group of businesses made up of 162 member manufacturers and affiliated
supplier companies that has represented broom, brush and mop manufacturers
since 1917.
A significant amount of U.S. corn broom production was lost to Mexico
after NAFTA took effect due to high labor content of the product. Three of the
four largest U.S. companies have either moved all, or a significant amount, of
their production to Mexico and most of the smaller U.S. manufacturers (or
former U.S. manufacturers) now import part or all of their finished products
from Mexico. In each instance NAFTA has caused “vanishing profits and
dwindling workforces” in the U.S. corn broom industry.
Textiles and Apparel
Overview
The U.S. textile and apparel sector267 is one of the world’s largest and
most efficient producers of high-volume goods such as denim and sheeting
fabrics. In the past two decades, however, the textile and apparel sector has
declined in relative worldwide importance primarily because of increased
global competition.268 Notwithstanding quotas and high tariffs, U.S. imports
have accounted for a growing share of domestic consumption. With the
existing quota system scheduled for elimination on January 1, 2005, U.S. textile
and apparel producers have been pursuing business strategies for survival in a
heightened competitive climate.
Labor costs are a critical competitive factor in both textile and apparel
manufacturing that often put U.S. manufacturers at a disadvantage vis-a-vis
countries such as China and India where wages are substantially lower. The
hourly wage in the U.S. textile industry was $14.24 in 2000, compared with
those in China and India which were $0.69 and $0.58, respectively, in the same
266 David C. Parr, Executive Director, American Brush Manufacturers Association,
written submission to the Commission, Feb. 14, 2003.
267 For the purpose of this investigation, the textile and apparel sector comprises SIC
groups 22 and 23, including textile mill products such as yarns, fabrics, carpets, and
other made--up articles, and apparel.
268 Because of high shipping costs, carpet production is less sensitive to import
penetration than other textile products. Subsequently, carpet manufacturers have not
experienced as many competitive challenges as producers in other segments of the textile
industry.
285
year (table 5-36).269 Average wages in the U.S. textile and apparel industries
increased 11 percent during 1978-2001.270 This is likely a reflection of the
demand for higher-skilled workers as domestic textile firms have adopted
more sophisticated production technology and apparel firms have retained
cutting jobs while sending lower-skilled sewing jobs offshore. Many U.S.
apparel manufacturers are concentrating domestic production for niche
markets that include high-fashion and high-quality tailored garments where
labor costs are less of a factor in determining competitiveness.
U.S. textile and apparel firms have restructured and consolidated operations
extensively during the past decade. The number of establishments in the U.S.
textile and apparel industries in 2000 totaled 11,300 and 16,500, respectively,
following a succession of plant closures that have occurred primarily since the
early 1990s. U.S. textile and apparel sector shipments fluctuated during
1978-2001, but declined overall from $176 billion in 1978 to $132 billion in
2001, the lowest level during the period. Textile industry employment
decreased by 50 percent to 400,000 employees during 1978-2001, while that of
the apparel industry declined by 62 percent to 436,000 employees. The apparel
industry incurred a greater reduction in employment due in part to the shift in
production and sourcing of finished goods offshore. The decline in textile
employment is partly attributable to erosion of the domestic production base
for apparel, a primary market for U.S. textile products, as well as to increased
automation, which has improved efficiency.
The U.S. textile industry faces shrinking domestic markets for its yarn and
fabric output largely because of growing imports of these goods as well as
end-use items such as apparel and home textiles, which often contain foreign
inputs. However, the growth in imports of apparel assembled from U.S. fabric
has boosted U.S. fabric exports and has helped offset weakness in domestic
demand for U.S. apparel fabrics.271 U.S. textile manufacturers are moving
away from markets that traditionally feed domestic apparel production (e.g.,
broadwoven fabrics), and into less vulnerable niche markets such as
performance wear, technical, and industrial fabrics.
In an effort to remain competitive, U.S. textile mills have invested heavily
in technology to increase productivity and capacity, while reducing
employment. The industry has achieved high levels of productivity in the
production of high-volume commodity goods such as denim and sheeting
269 The year 2000 is the last year for which data were available. Wages are for
spinning and weaving jobs within the textile industry only, comparable apparel sector
wage data for the same year were not available. Werner International, International Wage
Survey, Year 2000.
270 Based on data from the U.S. Department of Labor, Bureau of Labor Statistics.
271 Mexico and Caribbean countries receive trade preferences for apparel imported
into the United States that has been assembled from U.S.--made fabrics. See trade
agreements portion of this section for more information on trade preferences under
NAFTA and the Caribbean Basin Trade Partnership Act (CBTPA).
286
Table 5-36
Textiles and apparel products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption
and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
161.8
24.5
3.7
182.6
-20.8
154.6
26.2
3.4
177.5
-22.9
157.0
29.6
3.8
182.8
-25.8
163.5
33.8
4.4
192.8
-29.4
162.6
33.2
5.4
190.4
-27.8
158.7
36.4
6.2
188.9
-30.1
13.4
2.3
14.8
2.2
16.2
2.4
17.5
2.7
17.4
3.3
19.3
3.9
1,823
1,550
1,803
1,534
1,822
1,551
1,813
1,544
1,796
1,529
8.29
8.33
8.30
8.27
8.27
100
102
105
105
104
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . .
Trade balance . . . . . . . . . . . . .
176.3
15.7
5.3
186.7
-10.4
168.6
14.8
6.8
176.6
-8.0
162.9
15.1
7.2
170.8
-7.9
160.2
16.4
6.4
170.3
-10.0
152.4
16.1
4.6
164.0
-11.5
166.9
19.0
4.0
181.8
-14.9
Percentage
Imports/apparent
consumption . . . . . . . . . . . .
Exports/shipments . . . . . . . . .
8.4
3.0
8.4
4.0
8.8
4.4
9.6
4.0
9.8
3.0
Total employment . . . . . . . . . .
Production workers . . . . . . .
2,231
1,928
2,189
1,888
2,111
1,816
2,067
1,772
1,911
1,623
Hourly earnings . . . . . . . . . .
8.47
8.43
8.36
8.32
8.23
10.4
2.4
1,000 workers
1,905
1,623
1,931
1,648
Constant (1996) dollars
8.27
8.27
$1,000 per worker
Labor productivity . . . . . . . . . .
See footnote at end of table.
91
89
90
90
94
98
98
287
288
Table 5-36—Continued
Textiles and apparel products:1 U.S. shipments, imports, exports, apparent consumption, ratios of imports to consumption
and exports to shipments, total employment, production workers, hourly wages, and productivity, 1978-2001
Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
157.9
50.2
14.3
193.8
-36.0
160.4
57.4
16.1
201.8
-41.4
154.4
62.6
16.1
200.8
-46.5
150.3
65.1
15.6
199.8
-49.5
148.0
72.5
16.5
204.0
-55.9
131.6
69.5
14.6
186.4
-54.9
Billions of constant (1996) dollars
Shipments . . . . . . . . . . . . . . . .
Imports . . . . . . . . . . . . . . . . . . .
Exports . . . . . . . . . . . . . . . . . .
Apparent consumption . . . . . .
Trade balance . . . . . . . . . . . . .
152.8
36.6
7.5
181.8
-29.0
149.2
36.5
8.8
177.0
-27.8
154.7
41.9
9.9
186.7
-32.0
157.3
44.3
10.8
190.8
-33.5
161.5
47.0
11.8
196.7
-35.2
161.0
49.1
13.1
197.0
-36.0
Percentage
Imports/apparent
consumption . . . . . . . . . . . .
20.1
20.6
22.5
23.2
23.9
24.9
25.9
28.5
31.2
32.6
35.5
37.3
Exports/shipments . . . . . . . . .
4.9
5.9
6.4
6.8
7.3
8.2
9.1
10.0
10.5
10.4
11.2
11.1
1,494
1,241
1,440
1,195
1,363
1,122
1,249
1,020
1,164
940
1,044
836
8.86
9.07
9.36
9.52
9.47
134
138
147
157
157
1,000 workers
Total employment . . . . . . . . . .
Production workers . . . . . . .
1,728
1,461
1,676
1,415
1,681
1,421
1,664
1,403
1,650
1,389
Hourly earnings . . . . . . . . . .
8.27
8.24
8.30
8.32
8.42
1,599
1,336
Constant (1996) dollars
8.54
8.70
$1,000 per worker
Labor productivity . . . . . . . . . .
1
105
105
109
112
116
121
127
Includes SIC 22 (textile mill products) and 23 (apparel and other finished products made from fabrics and similar materials).
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of Economic Analysis and Bureau of the
Census; and U.S. Department of Labor, Bureau of Labor Statistics.
fabrics, and in printing, dyeing, and finishing operations. Textile mills have
also invested in technology to improve manufacturing flexibility in an effort
to coordinate production and marketing with the needs of their downstream
apparel customers. Domestic investment in U.S. textile machinery during
1978-2001 averaged $2.1 billion per year and $2.7 billion per year during the
1990s.272 The adoption of new manufacturing technologies enabled U.S.
broadwoven fabric mills to increase fabric output per loom hour from 16 to
35 square meters during 1989-99.273 Largely as a result of this investment,
labor productivity in textile manufacturing increased 73 percent from
1978-2001.
The U.S. apparel industry is a competitive and fragmented sector that
mostly comprises small establishments. The industry has undergone major
restructuring during the past decade in response to rising import competition,
changing consumer preferences, and increasing share of sales to a few large
retailers. The strong bargaining power of these retailers tends to reduce the
flexibility of producers in negotiating prices and delivery dates, and enables
retailers to minimize inventory levels and push inventory costs back up the
supply chain.274 In response, U.S. apparel producers are increasing their focus
on core products, reducing vertical integration to shed overhead costs,
outsourcing more processes in the production chain domestically and offshore,
and merging with other apparel companies to consolidate resources and capture
greater market share. Many smaller firms that are labor intensive and lack the
financial resources, brand names, or operating efficiencies to compete have
gone out of business.
The competitive pressures from retailers and foreign suppliers have
prompted many U.S. apparel firms to invest in new technology and improve
production and marketing processes in an effort to maximize their inherent
advantage of market proximity. These firms now operate quick response (QR)
systems to speed the flow of goods, services, and information between
segments of the industry, linking them electronically with textile suppliers and
retailers. Quick response programs provide apparel firms with timely access to
point-of-sale retail data, enabling them to focus production on apparel items
with strong consumer appeal and maintain enough production flexibility to
adapt to changing market demands. Although upgrades in technology have
revolutionized the apparel industry’s supply chain management, production of
most garments remains labor intensive, largely because of the difficulty in
automating most sewing functions.
272
Capital expenditures for the 13--year period from 1978--2001 in the textile and
apparel industries totaled $50 billion and $19 billion, respectively (to include equipment
and software purchases). U.S. Department of Commerce, Bureau of Economic Analysis,
Historical--Cost Investment in private Equipment and Software by Industry (Table 3.7E),
found at http://www.bea.gov, retrieved Sept. 25, 2002.
273 U.S. Department of Commerce, Census Bureau, CIR: Broadwoven Fabrics
(Gray) Summary -- 1999 (MQ313T(99)--5), issued June 2000, and selected back issues.
274 Industry official, interview by USITC staff, New York, NY, May 13, 2002.
289
The decline in domestic demand for U.S.-made textiles has been offset, in
part, by the implementation of special access programs under heading
9802.00.80 of the Harmonized Tariff Schedule (formerly TSUS item 807.00)
that provide for the establishment of preferential quotas for apparel products
assembled in eligible countries from U.S.-origin fabrics. Such arrangements
allow domestic apparel companies to reduce costs on highly labor intensive
sewing and detailing processes, while maintaining a market for U.S. textile
products. A significant but declining part of the apparel imports under this
tariff provision come from Caribbean Basin Economic Recovery Act (CBERA)
countries and Mexico, which mainly compete with one another for assembly
work from U.S. firms.275 In addition to competitively priced labor, the
proximity of these countries to the United States provides U.S. firms with
greater management control over production, quicker turnaround, and lower
shipping costs than would Asian operations. The value of garment parts cut to
shape in the United States and sent offshore for assembly totaled $6 billion in
2001.
Effects of Trade Agreements on the Sector
The substantial rise in U.S. textile and apparel trade since 1982, and the
subsequent effects on the domestic industry can be attributed in part to the five
trade agreements considered in this investigation. While tariff reductions in
certain agreements (e.g., Tokyo Round) directly impacted trade flows, most
sector trade is still restricted by quotas originally set by the Multifiber
Arrangement and continuing until January 1, 2005 under the Agreement on
Textiles and Clothing (see Uruguay Round section later in this chapter for
additional details). Furthermore, other factors such as the Caribbean Basin
Economic Recovery Act, currency devaluations in Mexico and certain Asian
countries, and the continuous emergence of low-cost producers world-wide
have also been influential. Each of the five subject agreements has impacted
the U.S. sector to varying degrees. Table 5-37 presents trade issues addressed
by the subject trade agreements that were relevant to the sector.
Tokyo Round
Between 1982 (the first year in which Tokyo Round tariff reductions were
applied to sector products) and 2001, total U.S. trade in textile and apparel
products increased more than 300 percent to $84 billion.276 While exports grew
275 U.S. imports of apparel from Mexico under 9802.00.80 have been declining
since the implementation of the NAFTA, as the Agreement provides duty--free entry of
such goods under HTS heading 9802.00.90.
276 While tariff reductions for most products came into force on Jan. 1, 1980, those
pertaining to textile and apparel products were deferred to Jan. 1, 1982 due to a special
snapback provision pertaining to the Multifiber Arrangement (MFA). The provision
290
Table 5-37
Textiles and apparel products: Trade issues addressed in trade agreements and U.S. tariffs
Trade issues and U.S. tariffs
Tariffs2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tokyo Round
U.S.-Israel
U.S.-Canada
Uruguay Round
NAFTA1
(1979) 21.8%
(1987) 16.8%
(1984) 16.1%
(1995) 0.3%
(1987) 9.8%
(1998) 0.5%
(1994) 13.1%
(1999) 10.9%
(1993) 4.9%
(2001) 0.4%
X
X
Technical barriers . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Import licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Customs valuation . . . . . . . . . . . . . . . . . . . . . . . . . .
X
Government procurement . . . . . . . . . . . . . . . . . . . .
X
Rules of origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Safeguard measures . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
X
X
X
X
X
X
X
X
X
TRIMs3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRIPS4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
X
X
X
1
2
X
The NAFTA provides that tariffs be eliminated by Jan. 1, 2003 for all industrial goods and by Jan. 1, 2008 for all other goods.
Average trade-weighted ad valorem or ad valorem equivalent tariff. Trade weights for the Tokyo Round and Uruguay Round are based on U.S. imports from the world
during the years indicated. Trade weights for the bilateral treaties and NAFTA are based on U.S. imports from the relevant countries. Unless otherwise noted, dates in
parentheses represent the year immediately prior to the entry into force of the agreement and the year of the final tariff reduction for most products and markets.
3 Trade-related investment measures.
4 Trade-related aspects of intellectual property rights.
Source: U.S. Trade Representative, Annual Report of the President of the United States on the Trade Agreements Program, various issues; U.S. Trade Representative,
Trade Policy Agenda and Annual report, various issues; and U.S. International Trade Commission, Operation of the Trade Agreements Program, various issues.
291
at an average annual rate of 5 percent to $15 billion in 2001, imports
increased by 8 percent annually to $69 billion. Consequently, the United
States recorded a trade deficit of $55 billion in 2001. International trade,
already firmly established within the sector prior to the Tokyo Round,
increased substantially during the period as globalization of the industry, and
a succession of new low-cost suppliers, led manufacturers and retailers to
alter production and sourcing patterns to reduce costs and maintain
competitiveness. Imports as a share of domestic consumption nearly
quadrupled from 10 to 37 percent during 1982-2001, while exports as a share
of shipments increased almost four-fold to 11 percent. Apparel products
accounted for a much larger share of sector imports in 2001 (88 percent) than
did textiles, while the two sub-sectors shared a nearly equal portion of
exports. Imports account for a much greater share of the consumption of
apparel than for textiles. For many significant apparel items such as shirts
and trousers, imports have captured more than 95 percent of the U.S. market.
It is likely that the effects of the Tokyo Round on the U.S. textile and
apparel industry were modest. The element of the agreement that most affected
the sector was the reduction in U.S. tariffs by an average of 21 percent over six
years. However, most of the pre-existing rules governing textile and apparel
trade were unaffected by the Tokyo Round as much sector trade continued to
be regulated by the Multifiber Arrangement (MFA), which was in force from
1974-1994.
U.S.-Israel FTA
Aggregate U.S. trade in textile and apparel products with Israel increased at
an average annual rate of 15 percent during 1984-2001, reaching $622 million,
of which apparel constituted $497 million (80 percent) (table 5-38). U.S.
exports of textiles and apparel to Israel increased by 106 percent to $41 million
while imports from Israel increased more than ten times to $582 million. The
most significant concentration of imports in 2001 occurred in women’s knit and
woven apparel, and home textiles, while exports of synthetic filament fibers
and yarns, and floor coverings dominated shipments to Israel. The sector trade
deficit with Israel broadened from $30 million to $540 million during
1984-2001, with apparel accounting for 85 percent of the imbalance. Despite
the widening gap, however, trade with Israel in textile and apparel products
accounted for less than one percent of total U.S. trade in the sector in 2001. In
that year, Israel was the 36th largest market for U.S. sector exports and the
24th largest supplier to the U.S. market.
276—Continued
stated that multilateral tariff reductions phased in over multiple years would return to
pre--negotiation levels in the absence of the MFA or a similar agreement. Because the
MFA was set to expire on Jan. 1, 1982, tariff reductions were postponed until that date in
order to avoid nullification if the MFA was not renewed.
292
Table 5-38
Textile and apparel products: U.S. trade with Israel, 1984-2001
Year
1984
1985
1986
1987
1988
1989
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
49.9
24,404.7
92.1
26,134.1
111.8
29,508.1
141.5
33,630.2
Total . . . . . . . . . . . . . .
24,454.7
26,226.1
29,619.9
33,771.7
1990
1991
1992
131.3
33,065.6
176.4
36,205.7
217.7
36,349.9
226.7
36,301.8
285.3
41,621.3
33,196.9
36,382.1
36,567.6
36,528.6
41,906.6
Percent
Israel/Total . . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
0.2
0.4
0.4
0.4
0.4
0.5
0.6
0.6
0.7
—
—
84.4
7.1
21.4
12.9
26.6
14.0
-7.2
-1.7
34.4
9.5
23.4
0.4
4.1
-0.1
25.8
14.7
Total . . . . . . . . . . . . . .
—
7.2
12.9
14.0
-1.7
9.6
0.5
-0.1
14.7
32.7
5,367.0
48.3
6,175.9
65.6
7,474.1
66.9
8,685.2
71.0
9,865.6
5,399.6
6,224.1
7,539.7
8,752.1
9,936.6
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
19.9
3,627.5
17.1
3,348.7
28.0
3,777.3
34.9
4,358.5
Total . . . . . . . . . . . . . .
3,647.4
3,365.8
3,805.3
4,393.4
Percent
Israel/Total . . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . .
0.5
0.5
0.7
0.8
0.6
0.8
0.9
0.8
0.7
—
—
-13.8
-7.7
63.4
12.8
24.6
15.4
-6.7
23.1
47.7
15.1
35.9
21.0
2.1
16.2
6.1
13.6
Total . . . . . . . . . . . . . .
—
-7.7
13.1
15.5
22.9
15.3
21.1
16.1
13.5
See note at end of table.
293
294
Table 5-38—Continued
Textile and apparel products: U.S. trade with Israel, 1984-2001
Year
1993
1994
1995
1996
1997
1998
1999
2000
2001
399.1
57,040.7
490.6
62,123.1
549.0
64,542.0
608.5
71,875.4
581.5
68,919.1
57,439.9
62,613.6
65,091.0
72,483.9
69,500.6
Millions of constant (1996) dollars
U.S. import value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
317.9
43,952.3
381.9
46,586.8
426.6
48,679.2
399.4
49,844.1
Total . . . . . . . . . . . . .
44,270.3
46,968.8
49,105.8
50,243.4
Percent
Israel/Total . . . . . . . . . . .
U.S. import growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.7
0.8
0.9
0.8
0.7
0.8
0.8
0.8
0.8
11.5
5.6
20.1
6.0
11.7
4.5
-6.4
2.4
-0.6
14.4
22.9
8.9
11.9
3.9
10.8
11.4
-4.5
-4.1
Total . . . . . . . . . . . . .
5.6
6.1
4.6
2.3
14.3
9.0
4.0
11.4
-4.1
85.6
15,961.4
71.5
16,065.3
64.5
15,565.1
51.5
16,490.9
41.0
14,593.8
16,047.0
16,136.8
15,629.6
16,542.4
14,634.9
Millions of constant (1996) dollars
U.S. export value
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
84.9
10,674.9
80.3
11,684.7
97.7
13,036.7
87.6
14,193.6
Total . . . . . . . . . . . . .
10,759.8
11,765.0
13,134.4
14,281.3
Percent
Israel/Total . . . . . . . . . . .
U.S. export growth
Israel . . . . . . . . . . . . . . .
All other . . . . . . . . . . . .
0.8
0.7
0.7
0.6
0.5
0.4
0.4
0.3
0.3
19.5
8.2
-5.4
9.5
21.7
11.6
-10.3
8.9
-2.3
12.5
-16.5
0.7
-9.8
-3.1
-20.1
6.0
-20.5
-11.5
Total . . . . . . . . . . . . .
8.3
9.3
11.6
8.7
12.4
0.6
-3.1
5.8
-11.5
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
It is not likely that the U.S.-Israel FTA had a measurable impact on the
domestic textile and apparel industry. While removal of quotas and most tariffs
on sector products under the agreement resulted in greater import levels from
Israel during 1984-2001, the country remains a relatively small supplier to the
U.S. market.
U.S.-Canada FTA
During 1987-2001, total U.S. trade in textile and apparel products with
Canada increased at an average annual rate of 12 percent, reaching $5.6 billion
(table 5-39). Textiles and apparel represented 53 percent and 47 percent of the
trade value, respectively. Canada’s share of total U.S. textile trade increased
from 8 percent to 18 percent in the period, while its share of total U.S. apparel
trade doubled from 2 percent to 4 percent. U.S. exports of textiles to Canada
increased by 256 percent to $1.7 billion in 2001, while exports of apparel rose
by 372 percent to $816 million. Within the same period, textile imports from
Canada increased by 511 percent to $1.3 billion and apparel by 339 percent to
$1.8 billion. Canada was the second largest market for U.S. textile and apparel
products in 1989 and the 11th largest supplier to the U.S. market. In 2001,
Canada remained the second largest market for U.S. sector products, but had
become the fourth largest supplier to the United States.
It is likely that the U.S.-Canada FTA had a significant effect on U.S. sector
trade and production, particularly during 1988-1993 prior to implementation of
the NAFTA, the trade provisions of which superseded those contained in this
agreement. During that period, elimination of tariffs and quotas led to a near
tripling of sector exports to Canada reaching $1.9 billion, while imports
followed a similar trend by more than doubling to $1.2 billion. The trade
surplus with Canada in sector products increased from $25 million to $766
million between 1988-1993, most of which is attributable to higher exports of
intermediate textile goods, industrial textiles, and floor coverings.
NAFTA
During 1994-2001, total U.S. trade in textiles and apparel with NAFTA
countries Canada and Mexico increased at an average annual rate of 12 percent
to $19 billion, compared with a 4-percent average annual increase in sector
trade with the rest of the world. Imports from Mexico increased by 184 percent
to $9 billion, while those from Canada rose by 109 percent to $3.1 billion.
Most of the increase occurred in apparel and manmade fibers. Exports to
Mexico, largely concentrated in broadwoven fabrics and garment parts for
assembly, increased to $4.8 billion (111 percent). U.S. exports to Canada
climbed to $2.4 billion (18 percent) during the 1994-2001 period, which
reflected increases in shipments of floor coverings and synthetic woven fabrics.
In 1994, Mexico and Canada were the fifth and seventh largest sector suppliers
to the United States, respectively, climbing to first and fourth place in 2001.
Despite a quadrupling of the textile trade surplus with Mexico to $1.8 billion
295
296
Table 5-39
Textile and apparel products: U.S. trade with Canada and Mexico, 1987-2001
Year
1987
1988
1989
1990
1991
1992
1993
1994
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
618.2
740.5
32,413.1
687.5
797.9
31,711.5
727.8
1,287.2
34,367.1
707.7
1,505.9
34,354.1
780.8
1,793.3
33,954.5
983.7
2,250.8
38,672.1
1,174.6
2,730.7
40,365.0
1,476.7
3,148.9
42,343.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33,771.7
33,196.9
36,382.1
36,567.6
36,528.6
41,906.6
44,270.3
46,968.8
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.8
2.2
2.1
2.4
2.0
3.5
1.9
4.1
2.1
4.9
2.4
5.4
2.7
6.2
3.1
6.7
—
—
—
—
11.2
7.8
-2.2
-1.7
5.9
61.3
8.4
9.6
-2.8
17.0
(1)
-0.5
10.3
19.1
-1.2
-0.1
26.0
25.5
13.9
14.7
19.4
21.3
4.4
5.6
25.7
15.3
4.9
6.1
Percent
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
642.9
542.9
3,207.6
711.2
718.7
3,969.7
810.0
957.7
4,456.5
1,465.6
1,081.9
4,992.2
1,620.6
1,273.2
5,858.3
1,730.3
1,656.9
6,549.5
1,940.9
1,888.5
6,930.5
2,119.0
2,295.0
7,350.9
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,393.4
5,399.6
6,224.1
7,539.7
8,752.1
9,936.6
10,759.8
11,765.0
Percent
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.6
12.4
13.2
13.3
13.0
15.4
19.4
14.4
18.5
14.6
17.4
16.7
18.0
17.6
18.0
19.5
—
—
—
10.6
32.4
23.8
13.9
33.3
12.3
80.9
13.0
12.0
10.6
17.7
17.4
6.8
30.1
11.8
12.2
14.0
5.8
9.2
21.5
6.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
22.9
15.3
21.1
16.1
13.5
8.3
9.3
See footnote at end of table.
Table 5-39—Continued
Textile and apparel products: U.S. trade with Canada and Mexico, 1987-2001
Year
1995
1996
1997
1998
1999
2000
2001
Millions of constant (1996) dollars
U.S. import value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,775.8
4,039.6
43,290.3
2,104.3
5,149.9
42,989.2
2,473.6
6,833.5
48,132.8
2,823.1
8,146.7
51,643.8
3,063.4
9,165.5
52,862.1
3,290.5
9,974.2
59,219.2
3,080.1
8,951.4
57,469.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,105.8
50,243.4
57,439.9
62,613.6
65,091.0
72,483.9
69,500.6
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. import growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.6
8.2
4.2
10.3
4.3
11.9
4.5
13.0
4.7
14.1
4.5
13.8
4.4
12.9
20.3
28.3
2.2
18.5
27.5
-0.7
17.6
32.7
12.0
14.1
19.2
7.3
8.5
12.5
2.4
7.4
8.8
12.0
-6.4
-10.3
-3.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.6
2.3
14.3
9.0
4.0
11.4
-4.1
2,981.5
4,445.7
8,709.6
2,848.4
5,168.1
7,613.1
2,772.8
5,604.6
8,165.0
2,490.7
4,840.3
7,303.8
16,136.8
15,629.6
16,542.4
14,634.9
Percent
Millions of constant (1996) dollars
U.S. export value
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,444.0
2,400.8
8,289.6
2,549.3
2,998.8
8,733.2
2,912.0
3,680.7
9,454.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,134.4
14,281.3
16,047.0
Percent
297
Canada/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico/Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. export growth
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.6
18.3
17.9
21.0
18.2
22.9
18.5
27.6
18.2
33.1
16.8
33.9
17.0
33.1
15.3
4.6
12.8
4.3
24.9
5.4
14.2
22.7
8.3
2.4
20.8
-7.9
-4.5
16.3
-12.6
-2.7
8.5
7.3
-10.2
-13.6
-10.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.6
8.7
12.4
0.6
-3.1
5.8
-11.5
1
Less than 0.5 percent.
Note.–Figures may not sum to total because of rounding.
Source: Compiled by the U.S. International Trade Commission from official statistics of the U.S. Department of Commerce, Bureau of the Census.
between 1994-2001, the $6 billion deficit in apparel trade resulted in a trade
deficit for the entire textile and apparel sector.
It is likely the agreement had a significant effect on U.S. sector trade and
production. The U.S. textile industry, especially fabric producers, has benefitted
from the increased use of U.S. fabric in apparel and other made-up textile
goods assembled in production-sharing operations in Mexico. Further, the
Agreement’s strict rules of origin virtually guaranteed high demand for U.S.
and Canadian fabrics and yarns given the abundance of low-cost apparel
manufacturing and lack of high-quality textiles available in Mexico. However,
as domestic textile mills have faced intense international competition in recent
years, many firms have reduced or discontinued operations despite demand in
Canada and Mexico. The agreement has had a more negative effect on the
domestic apparel industry as competition from garments produced in Mexico
using low-cost labor have caused many U.S. manufacturers to close down or
move assembly operations offshore.277 Furthermore, devaluation of the
Mexican peso in December 1994-January 1995 greatly enhanced Mexico’s
competitive position in the U.S. market.
Uruguay Round
Total U.S. trade in textiles and apparel increased at an average annual rate
of 5 percent during 1995-2001, reaching $84 billion at the end of the period.
Imports of textiles increased by 23 percent to $8 billion while exports rose by
44 percent to $8 billion. During the same period, apparel imports climbed by
52 percent to $61 billion while exports increased by 8 percent to $7 billion.
The strong growth of apparel imports relative to that of exports increased the
sector trade deficit by 56 percent to $55 billion.
The Uruguay Round established the Agreement on Textiles and Clothing
(ATC), which replaced the MFA as the comprehensive agreement governing
global trade in this sector. The ATC established a ten-year schedule for
acceleration of quota growth rates and gradual phase-out of all MFA quotas in
four stages by January 1, 2005, with remaining quotas phased out at a faster
rate than previously.278 During the first three stages of integration, completed
on July 1, 2002, quotas on at least 51 percent of eligible products were phased
out.279 Because importing countries had considerable flexibility in selecting
277
Industry official, telephone interview by USITC staff, June 21, 2001.
MFA quotas were applied on a country--specific basis. This was a departure from
the GATT nondiscrimination principle that all GATT--member countries be treated
equally when quotas or other trade restrictions are applied.
279 The quota phase--out schedule required 16 percent integration on July 1, 1995, an
additional 17 percent on July 1, 1998, and another 18 percent on July 1, 2002. Individual
countries were allowed to determine which products from each of four categories (tops
and yarns, fabrics, made--up textile products, and apparel) that they would included in
each tranche.
278
298
products for inclusion in each phase, the United States delayed removing
quotas on the most import-sensitive products until the final stage. It is
possible that considerable disruption, including major switching among
import suppliers, will occur to the domestic industry when quotas on the
remaining 49 percent of goods are eliminated, as products under those
categories accounted for 85 percent of textile and apparel imports in 2001.
Certain products that were fully integrated on January 1, 2002 have
experienced increases in import levels by quantity though the value of those
imports may have declined. For example, overall shipments of infants’
apparel into the United States in 2002, no longer subject to quotas, rose
10 percent by volume but decreased 3 percent in value, most likely resulting
from a large increase in low-price imports from China which replaced
higher-priced imports from other sources.280 The ATC also required members
to reduce or eliminate nontariff barriers and facilitate customs, administrative,
and licensing procedures. According to U.S. industry representatives,
however, many such barriers remain in foreign markets or have been created
by countries seeking to offset WTO market concessions using measures such
as onerous labeling requirements or lengthy pre-import inspections.281 U.S.
consumers have likely benefitted to some degree already from lower prices
and greater product diversity.
Views of Interested Parties
Association of the Nonwoven Fabrics Industry 282
The Association of the Nonwoven Fabrics Industry (INDA) is the trade
association of the nonwovens industry, a multi-billion-dollar business in the
United States and abroad. INDA members are involved in the manufacture of
nonwoven roll goods and production of primary materials and machinery used
to create nonwovens. INDA members also include companies that convert
nonwoven roll goods into finished products such as disposable baby diapers,
surgical drapes and gowns, filtration materials, wiping products, construction
materials, geotextiles, and numerous other end-use applications.
280 Based on category 239 Major Shippers Report data from the Department of
Commerce. China’s category imports increased 826 percent by quantity in 2002, while
just 298 percent by value.
281 American Textile Manufacturers Institute, “Promises Unkept: A Report on
Market Access for U.S. Textile and Apparel Products Five Years into the World Trade
Organization,” Mar. 17, 2000.
282 Jessica Franken, Government Affairs Associate, Association of the Nonwoven
Fabrics Industry, written submission to the Commission, March 31, 2003.
299
The unilateral phaseout of U.S. tariffs on nonwoven roll goods during the
Uruguay Round, which went from a high of 16 percent in 1994 to zero as of
January 1, 1999, has been at least partially responsible for a dramatic
narrowing in the gap between U.S. imports and U.S. exports of nonwoven roll
goods (as measured in kilograms) over the past six years. Imports of nonwoven
roll goods to the United States increased more than 140 percent during
1996-2001, while U.S. exports have risen by a more modest rate of 59 percent
over the same period. The United States exported 162 percent more nonwoven
roll goods than it imported during 1996, although by 2001 that gap had
narrowed such that the U.S. exported 72 percent more nonwoven roll goods
than it imported. Given these trends, INDA is concerned that imports of
nonwoven roll goods to the U.S. will match, and perhaps exceed, U.S. exports
within the next few years.
“The nonwovens industry has often been regarded as one of the few bright
points within the struggling textiles sector of the U.S. economy, but these duty
imbalances threaten to reverse that trend.” INDA requests that the USITC
reflect in its investigation the difficulties its industry has experienced as a result
of the elimination of tariffs of nonwoven roll goods during the Uruguay Round.
300
CHAPTER 6:
The Impact of NAFTA
Preferences on U.S.-Mexican
Trade: A Sectoral Approach
Introduction
NAFTA came into effect on Jan. 1, 1994. The Agreement capped nearly a
decade of improved and expanded trade ties between the United States and
Mexico, and widened the scope of the U.S.-Canada Free Trade Agreement
(CFTA), which was signed in 1989. A large number of studies have examined
NAFTA and its effect on trade. However, due to the lack of historical data, the
majority of these studies used computable general equilibrium (CGE) models
to address this question.1 The general consensus of these ex ante studies is that
NAFTA would provide large positive benefits to the Mexican economy, have
small but positive effects on the U.S. economy, and have minimal effects on
the Canadian economy.
1 A notable exception is USITC, The Impact of the North American Free Trade
Agreement on the U.S. Economy and Industries: A Three-Year Review, USITC
Publication No. 3045, June 1997. As discussed in chapter 4, this study uses import and
export demand functions to examine the effects of NAFTA on North American trade at
the aggregate level, between 1989 and 1996. The study reports the volume of U.S.
imports from Mexico increased by 10 percent in 1994, by 5.7 percent in 1995, and 6.4
percent in 1996, as a result of NAFTA. The volume of U.S. exports to Mexico rose by
1.3 percent in 1994, was 3.8 percent higher in 1995, and 3.2 percent higher in 1996.
However, there were no significant effects of NAFTA on U.S. aggregate trade with
Canada. Using a similar methodology, the study analyzed almost 200 industries,
accounting for more than 85 percent of trade between the United States and its NAFTA
partners. For most of the industries analyzed, the USITC found no discernible impact of
NAFTA on changes in the volume of bilateral trade between member countries.
However, U.S. exports to Mexico increased significantly in 13 industries, and fell in
none. U.S. imports from Mexico increased in 16 industries, and decreased in seven
industries. U.S. exports to Canada increased in 10 industries, and fell in eight industries,
while U.S. imports from Canada increased in 13 industries, but declined in eight
industries.
301
In ex post studies, it is difficult to isolate the effect of NAFTA on trade,
partly because other domestic and trade-related events occurred close to or
during the NAFTA phase-in period. These events include political instability in
Mexico, the devaluation of the peso in December 1994, and the establishment
of the World Trade Organization in 1995. Furthermore, not all tariffs on traded
commodities were eliminated between the United States, Canada, and Mexico
in 1994. For most commodities, tariffs are being phased out over a
10-to-15-year period, depending on the commodity category. Therefore, North
American trade flows since 1994 are not entirely free of duty. Moreover, in
addition to tariff reductions, NAFTA contains other provisions relating to
nontariff barriers, border measures, and dispute resolution mechanisms that can
be expected to generate changes that are difficult to quantify. These factors
complicate the analysis and make it more difficult for researchers to adequately
capture the effects of NAFTA on trade among member countries.
Nevertheless, sufficient time has now elapsed since the implementation of
NAFTA to make statistical testing feasible. The objective of this chapter is to
estimate statistically the impact of NAFTA tariff reductions and tariff
preferences on U.S. and Mexican trade in goods across industries.2 Three
specific questions are examined. First, did reductions in U.S. and Mexican
tariffs under NAFTA increase import shares significantly across industries?
Second, did import shares increase more in industries with relatively larger
NAFTA tariff preferences? Third, does the response to NAFTA tariff
liberalization differ significantly across industries?
This chapter examines the changes in Mexican shares of U.S. imports of
manufactured goods from 1989-2001, and changes in U.S. shares of Mexican
imports of manufactured goods from 1991-1999.3 In order to include the
pre-existing GSP preferences, and the gradual phase-in of NAFTA, the applied
tariff preferences are used for each product over the time period. The impact of
both tariff reductions and tariff preferences on import shares are examined
across industries. Tests for differences in response to tariff reductions and tariff
preferences before and after NAFTA are conducted. For the U.S. market, tests
for differences in response across industries are conducted.
Results suggest that U.S. tariff reductions and tariff preferences under
NAFTA did have a significant impact on Mexican shares of U.S. imports.
About one-third of the growth in Mexico’s import shares could be attributed to
U.S. tariff reductions and tariff preferences under NAFTA. The impact of both
2 As stated above, the Commission analysis examines tariff reductions on goods
only. It does not examine changes in non-tariff barriers, nor trade in services.
3 Clearly, additional U.S. tariff reductions after 2001 and Mexican tariff reductions
after 1999 are not included. Since much of the phase-in took place by 2001, this is not
likely to bias the results.
302
U.S. tariff reductions and U.S. tariff preferences was larger after NAFTA
relative to the period as a whole. Estimates for the textile and apparel
industry showed an even stronger response to U.S. trade liberalization and
U.S. tariff preferences under NAFTA, suggesting that responses to NAFTA
are likely to differ across sectors. Results also suggest that Mexican tariff
reductions and tariff preferences under NAFTA had a significant impact on
U.S. shares of Mexican imports. Mexican trade liberalization toward the
United States under NAFTA implied an expansion of about 13 percent in the
average U.S. share of Mexico’s manufactured goods imports. However, this
expansion was almost completely offset by the depreciation of the peso
against the dollar.
Previous Studies4
There is much debate as to whether the NAFTA has had any significant
impact on trade flows. Recent ex post statistical studies show conflicting
results, while leaving some questions unanswered. Agama and McDaniel5
study the impact of U.S. NAFTA tariff preference toward Mexico on aggregate
U.S. imports from Mexico between 1989 and 2001. They explicitly capture the
gradual phase-in of these preferences. The authors find that U.S. tariff
preferences did significantly increase U.S. imports from Mexico, and that the
impact of NAFTA tariff preferences on U.S.-Mexican trade was significantly
larger than the impact of U.S. preferences extended to Mexico prior to
NAFTA. Agama and McDaniel also find that Mexican tariff preferences under
NAFTA significantly increased Mexican aggregate imports from the United
States. These results are in sharp contrast to those of Krueger.6 Examining U.S.
aggregate imports from Mexico between 1991 and 1997, Krueger finds little
evidence that membership in NAFTA had significant effects on North
American trade. However, she does argue that trade in some individual sectors
may have increased due to NAFTA.
Romalis7 examines the impact of the U.S. NAFTA preferences on
Canadian and Mexican shares of U.S. imports across industries. In general, he
finds a positive, significant effect of NAFTA trade preferences on Mexican and
Canadian shares of U.S. imports. However, his analysis does not directly
capture the year-by-year phase-in of the NAFTA tariff preferences. Fukao,
4
See appendix B for a more detailed discussion of the papers cited in this section.
Laurie-Ann Agama and Christine A. McDaniel, “The NAFTA Preference and
U.S.-Mexico Trade: Aggregate Level Analysis,” The World Economy, forthcoming
2003.
6 Ann O. Krueger, “Trade Creation and Trade Diversion Under NAFTA,” National
Bureau of Economic Research (NBER) Working Paper, December 1999.
7 John Romalis, “NAFTA’s Impact on North American Trade,” University of
Chicago Graduate School of Business Working Paper, 2001.
5
303
et al.,8 also examine U.S. imports from Mexico and Canada across
manufactured goods, from 1992-1998. They find that U.S. tariff reductions
under NAFTA implied increases in Mexican and Canadian shares of U.S.
imports for a significant number of industries. However, Fukao, et al. do not
explicitly test the effect of U.S. tariff preferences under NAFTA.
NAFTA and North American Trade
United States 9
Figure 6-1 shows a comparison across sectors of U.S. applied tariffs against
U.S. imports from Mexico for the pre- and post-NAFTA implementation
period.10 The figure shows substantial variation in the initial level of protection
as well as differences in the degree of tariff liberalization across sectors.11 In
1993, the U.S. applied tariffs on imports from Mexico ranged, on average,
from a low of only 0.7 percent on wood products to a high of 9.4 percent on
textiles and apparel products. Between 1993 and 2001, applied tariffs on
Mexican goods fell across all sectors as tariff reductions under NAFTA were
phased in. By 2001, U.S. applied tariffs on goods imported from Mexico
ranged from nearly free trade in wood products to about 1 percent on footwear
products. The textile and apparel sector experienced the largest decline, as the
average tariff fell from over 9 percent in 1993 to less than 1 percent in 2001.
Figure 6-2 shows that U.S. applied tariffs on goods imported from non-NAFTA
countries followed a similar pattern, declining across all sectors between 1993
and 2001, largely due to the Uruguay Round. However, U.S. tariffs against the
non-NAFTA partners fell at a much slower rate than those against Canada and
Mexico.
Figure 6-3 shows the variation in tariff preference that the United States
extended to Mexico between 1993 and 2001 across sectors. With the exception
of the agriculture sector, Mexico received a tariff preference in all sectors prior
to the implementation of NAFTA, under the GSP program, the
production-sharing provisions of the United States Harmonized Tariff System
(HTS), and under duty suspension in HTS chapter 99. After NAFTA came into
effect, Mexico was no longer eligible for GSP program benefits. The tariff
8
Kyoji Fukao, Toshihiro Okubo, and Robert Stern, “An Econometric Analysis of
Trade Diversion,” The North American Journal of Economics and Finance, vol. 14, No.
1, March 2003, pp. 3-24.
9 All data on U.S. trade and tariffs are taken from the U.S. Department of
Commerce.
10 Applied tariffs are calculated as the ratio of collected import duties to customs
value of total imports from Mexico.
11 Sectors are defined according to the section classifications in the HTS. See table
B-1 in appendix B.
304
Figure 6-1
Simple average U.S. tariff on imports from Mexico, 1993 and 2001
1993
10
2001
9
8
Average tariff
7
6
5
4
3
2
1
Transportation
Textiles and Apparel
Plastics
Wood Products
Miscellaneous Manufactures
Minerals and Metals
Machines
Footwear
Chemicals
Agriculture
0
Source: Commission calculations and U.S. Department of Commerce data.
305
Figure 6-2
Simple average U.S. tariff on Non-NAFTA imports, 1993 and 2001
1993
14
2001
12
Average tariff
10
8
6
4
2
Source: Commission calculations and US Department of Commerce data.
306
Transportation
Textiles and Apparel
Plastics
Wood Products
Miscellaneous Manufactures
Minerals and Metals
Machines
Footwear
Chemicals
Agriculture
0
Figure 6-3
Average U.S. tariff preference toward Mexico: Pre and post NAFTA
1993
10
1994
2001
Average preference margin
8
6
4
2
0
Transportation
Textiles and Apparel
Plastics
Wood Products
Miscellaneous Manufactures
Minerals and Metals
Machines
Footwear
Chemicals
Agriculture
-2
Source: Commission calculations and U.S. Department of Commerce data.
307
preference increased for all sectors (except plastics), and remained positive in
2001, although it declined slightly in some sectors, most likely due to
multilateral tariff cuts under the Uruguay Round.
Mexico’s share of U.S. imports for 1993, 1994, and 2001, grouped by U.S.
2001 tariff preference, are shown in figure 6-4. Although Mexico increased its
import share in both the pre- and post-NAFTA period, the growth in Mexico’s
share of U.S. imports accelerated across all preference ranges during the
NAFTA years. It is clear that products that received positive preferences in
2001 did experience significant growth between 1989 and 1993. However, after
the implementation of NAFTA, growth rates for these products accelerated,
particularly for products with preferences exceeding 5 percentage points.12
Mexico 13
Figure 6-5 shows the distribution of Mexico’s tariffs against imports from
the United States.14 It is evident that between 1991 and 1999, Mexican tariffs
fell dramatically across all product categories.15 Mexico’s average tariff fell
from an initial level of 13.8 percent in 1991, to an average level of only 3.9
percent in 1999. Mexico’s initial tariffs against U.S. products varied across
sectors, ranging from about 11.0 percent for chemical products to 18.0 percent
for miscellaneous manufactures products. The largest reduction in average
tariff, 13.5 percentage points, took place in the miscellaneous manufactures
sector. The textiles and apparel and footwear sectors experienced declines of
almost 12 percentage points, closely followed by the machinery and
transportation sectors with reductions in tariffs of more than 11 percentage
points.
Mexico’s average tariffs against non-NAFTA partners were the same as
those against the United States prior to NAFTA (figure 6-6). However,
Mexican tariffs against non-NAFTA countries actually rose between 1991 and
1999, most likely reflecting a decision made in response to the peso crisis.16
The largest increases are seen in textiles, apparel, and footwear items. As a
result of continued tariff cuts on products imported from the United States,
coupled with increased barriers against non-NAFTA partners, Mexican tariff
preferences toward the United States grew considerably, as shown in figure
6-7.
12
This includes more than 700 items at the HTS 6-digit level.
All Mexican trade and tariff data are taken from the United Nations Conference
on Trade and Development’s Trade Analysis and Information System.
14 Applied tariffs are calculated as the ratio of import duties to customs value of total
imports from the United States.
15 Sectors are defined according to the section classifications in the HTS. See table
B-1 in appendix B.
13
308
Figure 6-4
Mexican share of U.S. imports by tariff preference: 1989, 1993, and
2001
1989
9
1993
2001
8
7
Average import share
6
5
4
3
2
1
0
<0
0
>0, <5
>0, <10
Preference margin (Percent)
>10, <20
>20
Source: Commission calculations and U.S. Department of Commerce data.
309
Figure 6-5
Mexico’s simple average tariff on imports from the United States:
1991, 1999
1991
20
1999
18
16
Average tariff
14
12
10
8
6
4
2
Source: Commission calculations and UNCTAD TRAINS data.
310
Transportation
Textiles and Apparel
Plastics
Wood Products
Miscellaneous Manufactures
Minerals and Metals
Machines
Footwear
Chemicals
Agriculture
0
Figure 6-6
Mexico’s simple average tariff on Non-NAFTA imports: 1991, 1999
1991
30
1999
25
Average tariff
20
15
10
5
Transportation
Textiles and Apaarel
Plastics
Wood Products
Miscellaneous Manufactures
Minerals and Metals
Machines
Footwear
Chemicals
Agriculture
0
Source: Commission calculations and UNCTAD TRAINS data.
311
Figure 6-7
Mexican tariff preference margin toward United States: Pre and
post NAFTA
1991
25
1995
1999
Average preference margin
20
15
10
5
Source: Commission calculations and UNCTAD TRAINS data.
312
Transportation
Textiles and Apaarel
Plastics
Wood Products
Miscellaneous Manufactures
Minerals and Metals
Machines
Footwear
Chemicals
Agriculture
0
Figure 6-8 shows the average U.S. share of Mexico’s imports during the
pre- and post-NAFTA periods grouped according to the NAFTA preference in
1999. U.S. shares rose in those categories with the larger preferences as
Mexico shifted its sourcing to its NAFTA neighbor. However, in categories
where the preference margins were small, U.S. import shares declined slightly.
The data show that initial U.S. shares varied across the categories of tariff
protection, ranging from 60.8 percent for goods afforded a preference greater
than 20 percent, to 69.3 percent for good with a preference between 5 and 10
percent. With the exception of the goods afforded a preference up to and
including 5 percent, U.S. shares grew across all preference categories
immediately after NAFTA came into effect, before declining slightly. By 1999,
again with the exception of goods with a preference below and including 5
percent, U.S. import shares had fallen below their 1995 levels, but remained at
or above their initial levels. U.S. import shares ranged from 58.1 percent for
items with a preference up to and including 5 percent, to 69.2 percent for items
afforded a preference between 5 percent and 20 percent.
Analytical Framework17
The Commission undertook a statistical analysis of the impact of NAFTA
tariff reductions and tariff preferences on U.S. and Mexican trade across
industries. Economic theory suggests that preferential trade liberalization, such
as NAFTA, should expand trade between the countries that are part of the
agreement. At the sectoral level, preferential liberalization might be expected to
significantly increase the import shares of partner countries. This study uses
conventional statistical techniques to test the impact of NAFTA on import
shares across sectors. Three questions are investigated. First, did reductions in
U.S. and Mexican tariffs under NAFTA increase import shares significantly
across industries? Second, did import shares increase more in industries with
relatively larger NAFTA tariff preferences? Third, does the response to NAFTA
tariff liberalization differ significantly across industries?
A country’s share of its partner’s imports in any industry is expected to be
predominantly a function of the price of that country’s imports relative to the
price of imports from other countries. Thus, Mexico’s share of US imports will
depend upon the price of Mexican imports relative to imports from other
countries. The same would be true for the United States’ share of Mexico’s
imports. The prices of imports from any country are made up of four key
components: the actual export price of the product, the additional markup due
to transport costs, the tariff applied to that imported good,18 and the exchange
rate, which translates the foreign currency price into the partner’s currency.
Changes in any of these four components will change relative prices, and thus
16
17
USITC (1997).
A detailed technical discussion may be found in Appendix B.
313
Figure 6-8
U.S. share of Mexican imports by tariff preference, 1991 and 19991
1991
80
59
1995
489
1999
2,265
70
790
508
U.S. Average import share
60
50
40
30
20
10
0
<0
>0, <5
>0, <10
>10, <20
>20
Preference margin (Percent)
1 Number above bars indicates the number of HTS 6-digit tariff lines in that
preference margin group in 2001
Source: Commission calculations and UNCTAD TRAINS data.
314
influence a country’s share of its partner’s imports. In order to isolate the
role of NAFTA trade preferences on import shares, changes in these other
key components are incorporated directly into the analysis.
The Commission analysis uses actual data on applied tariff rates throughout
the period 1989-2001, to capture both the differences in tariff preferences
across goods and the gradual phase-in of preferences over time under NAFTA.
Proxies for export prices from the United States, Mexico and other countries
are included, as well as measures of changes in the peso-dollar exchange rate,
and in U.S. and Mexican purchasing power over imports from other sources.
Lagged import shares are included to help capture the fact that markets do not
always adjust to policy changes immediately, and that Mexican or U.S. import
shares may be historically high or low in some products. The tariff level itself
is also included, since in any given year, regardless of the tariff preference,
Mexico or the United States would likely have relatively smaller import shares
in products where they face relatively highly barriers.
Several conclusions from previous studies are also examined. Agama and
McDaniel suggested that U.S. preferences toward Mexico did significantly
raise Mexico’s share of U.S. imports at the aggregate level, and that these
preferences mattered more after NAFTA than before. In the present study, an
explicit test is conducted to see if the impact of U.S. preferences differs before
and after NAFTA. Krueger suggested that any significant change in Mexico’s
share of U.S. imports was likely due to the major peso devaluation in late
1994, rather than NAFTA. The present study allows a direct comparison of the
influence of the trade preferences relative to exchange rate changes during this
time period. Krueger also suggests that specific sectors, such as textiles and
apparel, may have been significantly impacted by the NAFTA preferences,
even if aggregate effects were negligible. The present study estimates the
effects of preferences specifically on Mexican shares of U.S. imports of textiles
and apparel, and compares the results to the impact on manufacturing as a
whole. A detailed discussion of data sources, definitions, and estimation
procedures can be found in Appendix B.
Results
United States
Tables 6-1 and 6-2 summarize the effect of United States NAFTA tariff
preferences on Mexico’s share of U.S. manufactured imports.19 Table 6-1
shows the impact of changes in NAFTA tariff preferences and other key
18
If other non-tariff barriers, such as quotas, also exist on a particular imported
product, the tariff -equivalent of such barriers must be taken into account to get an
accurate estimate of the increase in price due to all trade barriers.
19 Complete results for the United States are reported in tables B-2 and B-3 in
appendix B.
315
Table 6-1
The impact of U.S. NAFTA preferences: Manufacturing sector
Percent Change in Mexican Share of
U.S. imports
All Manufacturing
Due to a 1 percent increase in:
Tariff preference . . . . . . . . . . . . . . . . .
Tariff preference post NAFTA . . . . .
Transport costs . . . . . . . . . . . . . . . . . .
Tariff level . . . . . . . . . . . . . . . . . . . . . .
Tariff level post NAFTA . . . . . . . . . . .
Lagged import share . . . . . . . . . . . . .
Exchange rate (peso/dollar) . . . . . . .
Price of imports from Mexico . . . . . .
Exchange rate (NEER) . . . . . . . . . . .
Price of imports from world . . . . . . . .
(1)
3.89
-6.69
-3.08
0.21
0.12
-0.14
-0.02
-0.03
(2)
2.09
4.46
-6.67
-2.47
-4.44
0.21
0.11
-0.14
-0.02
-0.03
Textiles
and
Apparel
(3)
10.31
5.29
-9.51
-2.99
-2.99
0.15
1 -0.02
-0.36
-0.01
0.25
1 Result not statistically different from zero at conventional levels. See
table B-2 in appendix B for details.
NOTE: Column (1) shows the impact of U.S. tariff preferences on Mexican
import share, controlling for changes in transport costs, exchange rates, export
prices, tariff levels, and lagged import share. Column (2) shows the results
when the impact of tariff preferences and tariff levels are allowed to differ
post-NAFTA. Column (3) contrasts the results for manufacturing as a whole
with those for the textile and apparel sector.
Source: USITC calculations. Data on U.S. tariffs and import values from the
U.S. Dept. of Commerce. Data on exchange rates from the IMF International
Financial Statistics.
economic factors on Mexico’s share of U.S. imports. Table 6-2 then shows
the relative importance of each of these factors in explaining the change in
Mexico’s import share between 1990 and 2001.
Impact of U.S. NAFTA tariff preferences on
Mexican import share
Table 6-1 reports results for three different statistical tests. Column (1) in
table 6-1 shows the impact of U.S. tariff preferences on Mexican import share,
controlling for changes in transport costs, exchange rates, export prices, tariff
levels, and lagged import share. Column (2) shows the results when the impact
of tariff preferences and tariff levels are allowed to differ post-NAFTA. In both
columns, the tariff preference has a strong positive impact on Mexico’s share
of U.S. imports. In column (2) between 1989 and 2001, a 1 percent increase in
316
Table 6-2
Explaining the growth of Mexico’s share of U.S. manufactured
imports, 1990-2001
Actual Increase in Average
Share:
63 percent
0.8
2.1
Implied
Change
in Import
Share3
Percent
1.7
1.2
-1.0
4.5
-2.5
5.4
2.5
-2.6
-0.7
-4.4
-6.7
11.4
4.7
230.0
14
0.1
-0.1
23.0
-1.4
Actual
Change1 Elasticity2
Tariff preference (percentage pt.) . . . . . . .
Tariff preference post NAFTA
(percentage pt.) . . . . . . . . . . . . . . . . . . . .
Tariff level (percentage pt.) . . . . . . . . . . . .
Tariff level post NAFTA
(percentage pt.) . . . . . . . . . . . . . . . . . . . .
Transport cost (percentage pt.) . . . . . . . . .
Peso/dollar exchange rate
(percent) . . . . . . . . . . . . . . . . . . . . . . . . . .
Mexican export price (percent) . . . . . . . . .
1
Actual historical change.
Sensitivity of Mexican import share to a 1-percent change in the policy,
cost or price listed on the left. Values taken from table 6-1, column (2).
3 The values in column (1) multiplied by the corresponding values in column
(2).
Source: USITC calculations. Data on U.S. tariffs and import values from the
U.S. Dept. of Commerce. Data on exchange rates from the IMF International
Financial Statistics.
2
the tariff preference raised Mexico’s import share by about 2 percent.
However, this impact more than doubled to 4.5 percent after NAFTA
implementation. This suggests that NAFTA preferences had a more
significant impact on import shares than the preferences extended to Mexico
prior to NAFTA.20 As might be expected, the level of protection is also a
critical factor in explaining Mexican import share. On average, a 1 percent
higher tariff on a particular product from Mexico, relative to other products,
implied a 2.5 percent smaller Mexican share of U.S. imports. This effect
intensified after NAFTA implementation, implying a 4.4 percent smaller
Mexican share of U.S. imports.
20 This may be because NAFTA preferences are exclusive to Mexico, whereas GSP
preferences of similar size were also received by other developing country exporters. It
may also reflect the perception that NAFTA preferences are deeper or more permanent.
Finally, it could reflect a perception that the tariff preferences signal other aspects of the
agreement, such as investment reforms.
317
Exchange rate changes and export prices are also important determinants of
the Mexican share of U.S. imports during this time period. A 1-percent
depreciation of the peso against the dollar would imply relatively cheaper
Mexican imports, and lead to a 0.12-percent increase in Mexico’s import share,
while a 1-percent depreciation of the dollar against other trading partners
would increase Mexico’s import share by 0.02 percent. A 1-percent increase in
the price of imports from Mexico relative to other countries lowered Mexico’s
share of imports by 0.14 percent.21 Finally, the higher the Mexican import
share in the previous year, the higher the Mexican import share in the present
year.
Because individual industries may respond differently to U.S. tariff
preferences under NAFTA, the scenario shown in column (2) was estimated for
an individual industry in which sufficient data were available: textiles and
apparel (HTS 11). Column (3) reports the results for the textile and apparel
sector. A comparison of columns (2) and (3) shows that Mexican shares of U.S.
imports in textiles and apparel are less responsive than manufacturing to tariff
preferences prior to NAFTA, but much more responsive after NAFTA. This
may be due in part to the presence of quantitative restrictions (QRs) on apparel
and textile imports which were in place prior to NAFTA, but removed after the
agreement was implemented.22 If binding, QRs would limit any response to a
tariff preference.23 Mexico’s textile and apparel import share is strongly
affected by the extent of tariff reductions (as is manufacturing), and appears
more sensitive to changes in the price of Mexican exports and to transport
costs than overall manufacturing. Column (3) thus provides some evidence that
individual industries may respond differently to trade liberalization.24
21 The impact of changes in competing exporters’ prices is likely to be small, given
that this is an unweighted average price over all sellers. However, its negative impact is
unexpected, and may be due to the fact that Mexico is a small seller of many products,
hence Mexican export prices move together with other larger competing exporters’
prices. Results for the textile and apparel industries (in aggregate) in column (3) show
the expected positive sign on price of imports from the world.
22 For detailed information on the removal of these QRs under NAFTA, see USITC,
The Economic Effects of Significant U.S. Import Restraints, Third Update 2002, USITC
Publication No. 3519, June 2002.
23 It would be tempting to test the impact of the NTBs in textiles and apparel by
including a measure such as the coverage ratio (the percent of tariff lines restricted by the
NTB). However, there are several problems with this approach. First, data are not readily
available over time prior to NAFTA, so no time variation can be captured. Second, the
coverage ratio does not measure the severity of the restriction, only its scope. Third,
since the restrictions are voluntary export restrictions, their severity is likely captured in
the premium exporters can charge for their products in the U.S. market. This premium is
part of the Mexican export price, and as presently calculated, it cannot be separated out
of the price variable.
24 Complete results for textiles and apparel are reported in table B-3, appendix B.
318
Importance of U.S. NAFTA tariff preferences for
Mexico’s import share
The results in table 6-1 show the responsiveness of Mexican shares of U.S.
imports to U.S. NAFTA tariff preferences and to changes in other key
economic factors. To see the relative importance of NAFTA trade
liberalization, compared to other economic factors, in explaining actual changes
in Mexican shares of U.S. manufactured imports, the results from table 6-1
must be combined with actual historical changes in tariffs, exchange rates,
transport costs, and Mexican export price. This is done in table 6-2.
The average Mexican share of U.S. manufactured imports was 4.5 percent
in 1991. This share grew by about 63 percent between 1990 and 2001. The
relative influence of NAFTA trade preferences and peso devaluation can be
approximated by using the values in table 6-2, column (1) and (2). Column (1)
shows the actual percentage change in tariff preferences, tariffs levels, transport
costs, Mexican export prices and the peso-dollar exchange rate between 1990
and 2001. The largest change during this period was the depreciation of the
peso against the dollar by about 230 percent. Column (2) shows the sensitivity
of the Mexican import share to a 1 percent change in each economic factor
(from table 6-1, column (2)). Multiplying the value in column (2) by 230.0
percent suggests that the actual depreciation of the peso raised Mexico’s
average share of U.S. imports by about 23.0 percent. This is recorded in
column (3). Peso depreciation thus accounts for about one-third of the growth
in Mexico’s average import share.
Table 6-2 also shows that the impact of U.S. tariff preferences and tariff
reductions had a large impact on Mexico’s share of U.S. imports. The average
U.S. tariff preference toward Mexico grew by 0.8 percentage points (prior to
NAFTA), and by 1.2 percentage points after NAFTA. Again, column (2) shows
the sensitivity of the Mexican import share to a 1-percent change in these
policy variables. Multiplying the values in column (1) by those in column (2)
suggests that larger U.S. tariff preference raised Mexico’s import share by 1.7
percent prior to NAFTA, and by 5.4 percent after NAFTA (column (3)). The
average U.S. tariff on Mexican manufactured goods fell by 1 percentage point
prior to NAFTA, and by 2.6 percentage points after NAFTA took effect. Again,
multiplying the values in column (1) by those in column (2), the drop in U.S.
average tariffs against Mexico raised Mexico’s import share by 2.5 percent
prior to NAFTA, and by 11.4 percent after NAFTA (column (3)). Adding the
first four numbers in column (3) suggests that overall trade liberalization
toward Mexico between 1990 and 2001 led to a 21 percent increase in
Mexico’s average share of U.S. imports. Thus, overall trade liberalization
toward Mexico accounted for about one-third of the growth in Mexico’s
average import share.
319
Mexico
Tables 6-3 and 6-4 summarize the impact of Mexican NAFTA tariff
preferences on the U.S. share of Mexican manufactured imports.25 Table 6-3
shows the impact of changes in NAFTA tariff preferences and other key
economic factors on the U.S. import share. Table 6-4 then shows the relative
importance of each of these factors in explaining the change in the U.S. import
share between 1991 and 1999.26
Impact of Mexican NAFTA tariff preferences on
U.S. import share
Table 6-3 shows that Mexican NAFTA preferences had a strong positive
impact on U.S. shares of Mexican imports. Column (1) shows the impact of
Mexican tariff preferences on U.S. import share, controlling for changes in
exchange rates. Column (2) shows the results when the 1991 tariff level and
1991 import share are included. In column (1) a 1-percent increase in the tariff
preference extended to the United States increased the U.S. share of Mexican
imports by 0.37 percent. This result is independent of the changes in the
exchange rate, which also had a significant impact. A 1-percent depreciation of
the peso against the dollar decreased Mexican imports from the United States
by 0.06 percent. At the same time, a 1-percent real depreciation of the peso
against all trading partners, currencies would lead to a 0.002-percent increase
in the U.S. share of Mexican imports.
Column (2) shows the importance of historical factors in influencing the
U.S. share of Mexican imports. If a U.S. product faced a 1-percent higher
Mexican tariff in 1991 relative to other U.S. products, the U.S. share of imports
of that product would be 0.84 percent lower in the future relative to other U.S.
products. Products in which the U.S. share of Mexican imports was high in
1991 had a larger U.S. share after NAFTA. A 1-percent higher U.S. share in
1991 led to a 0.49 percent higher U.S. share post-NAFTA. Column (2) also
shows that after controlling for these historical influences, the impact of the
Mexican tariff preferences on U.S. import share is larger. Now, a 1-percent
higher Mexican tariff preference toward the United States raises the U.S.
import share by 0.44 percent.
25
Complete results for Mexico are reported in tables B-4 in appendix B.
Limitations in the availability of Mexican tariff data, especially prior to NAFTA,
meant that only 3 years of data–for 1992, 1995, and 1999–could be used in the statistical
tests. The nonconsecutive nature of the data means that lagged effects cannot be
included. In addition, all Mexican import data are c.i.f. value, and thus, unit values and
transport costs cannot be calculated.
26
320
Importance of Mexican NAFTA tariff preferences
for U.S. import share
The results in table 6-3 show the responsiveness of U.S. shares of Mexican
imports to Mexican NAFTA tariff preferences and to changes in other key
economic factors. Again, to see the relative importance of NAFTA trade
liberalization, compared to other economic factors, in explaining actual changes
in U.S. shares of Mexican manufactured imports, the results from table 6-3
must be combined with actual historical changes in tariff preferences and
exchange rates. This is done in table 6-4.
The average U.S. share of Mexican manufactured imports was about 64.6
percent in 1991. By 1999, this average share had grown by about 2.5 percent.
The relative influence of NAFTA trade preferences and peso devaluation can
be approximated by using the values in table 6-4, columns (1) and (2). Column
(1) shows the actual percentage point change in tariff preferences, the tariffs
level, and the peso-dollar exchange rate, between 1990 and 2001. The degree
of Mexican trade liberalization was large during this period. Tariffs against the
United States fell by about 10 percentage points on average, and preferences
rose from zero in 1991 to 12.2 percent in 1999. Column (2) shows the
sensitivity of U.S. import share to a 1-percent change in these policies.
Multiplying the values in column (2) by those in column (1) suggests that
larger Mexican tariff reductions increased the U.S. import share by 8.4 percent,
while larger tariff preferences increased the U.S. import share by 5.3 percent.
These are recorded in column (3). Adding the first two values in column (3)
indicates that overall Mexican trade liberalization between 1991 and 1999
raised the average U.S. share of Mexican imports by about 13.7 percent.
Clearly the 230 percent depreciation of the peso counteracted this increase.
Again multiplying 230 percent by the corresponding value in column (2)
suggests that the depreciation of the peso against the dollar led to an 11.5
percent drop in the average U.S. share of Mexican imports. These results
suggest that the overall small growth in U.S. share of Mexican imports was not
due to insensitivity to trade liberalization, but due to the counteracting forces of
trade liberalization and peso devaluation.
321
Table 6-3
The impact of Mexican NAFTA preferences: Manufacturing sector
Percent change in U.S. Share of
Mexican imports
Due to a 1 percent increase in:
Tariff preference . . . . . . . . . . . . . . . . .
(1)
0.370
(2)
0.440
Exchange rate (peso/dollar) . . . . . . .
-0.060
-0.050
Exchange rate (REER) . . . . . . . . . . . .
-0.002
-0.002
Tariff level in 1991 . . . . . . . . . . . . . . . .
-
-0.840
Import share in 1991 . . . . . . . . . . . . . .
-
0.490
Column (1) shows the impact of Mexican tariff preferences on U.S. import
share, controlling for changes in exchange rates. Column (2) shows the results
when the 1991 tariff level and 1991 import share are included.
Source: USITC calculations. Data on Mexican tariffs and import values from
UNCTAD TRAINS. Data on exchange rates from the IMF International
Financial Statistics.
Table 6-4
Explaining the growth of U.S. share of Mexican manufactured
imports, 1991-1999
Actual Increase in Average Share:
2.5 percent
Actual
change1
Elasticity2
Implied
Change in
Import
Share3
Percent
Tariff preference
(percentage pt.) . . . . . . . .
Tariff level
(percentage pt.) . . . . . . . .
Peso/dollar exchange rate
(percent) . . . . . . . . . . . . . .
12.2
-10.0
0.44
-0.84
5.3
8.4
230.0
-0.05
-11.5
1
Actual historical change.
Sensitivity of U.S. import sare to a 1-percent change in the policy listed
on the left. Values taken from table 6-1, column (2).
3 The values in column (1) multiplied by the corresponding values in column (2).
2
Source: USITC calculations . Data on Mexican tariffs and import values from
UNCTAD TRAINS. Data on exchange rates from IMF International Financial
Statistics.
322
Conclusion
The Commission results suggest that tariff reductions and tariff preferences
did have a significant impact on Mexican shares of U.S. manufactured goods
imports between 1990 and 2001. From an initial average level of about 5
percent, Mexican shares of U.S. imports grew, on average, by about 63 percent.
Of this, roughly one-third could be attributed to tariff reductions and tariff
preferences. Another third could be attributed to the appreciation of the dollar
relative to the peso. Tariff reductions and tariff preferences had a significantly
larger effect after NAFTA relative to the period as a whole. Estimates for the
textile and apparel industry showed an even stronger response to trade
liberalization and tariff preferences, suggesting that there may be differences in
responsiveness to NAFTA trade liberalization across individual industries.
The Commission results indicate that both tariff reductions and tariff
preferences had a significant impact on U.S. shares of Mexican manufactured
goods imports between 1991 and 1999. The average U.S. share of Mexican
imports began at about 65 percent and grew by about 2.5 percent. Though this
expansion was small on net, Mexican trade liberalization toward the United
States would have implied an expansion of about 13 percent. However, this
expansion was nearly completely offset by the depreciation of the peso against
the dollar.
323
CHAPTER 7:
Comparative Simulations of the
Economywide Effects of the Five
Trade Agreements Negotiated
Under Fast-Track Authority
Overview
This chapter provides a consistent structural analysis of the five trade
agreements negotiated under fast-track authority. The analysis uses time
appropriate data on trade and overall economic conditions to quantify the
difference between the economy as observed under liberalization (the
benchmark) and the simulated economy in the absence of liberalization. For
transparency, and to highlight the relative impacts of each agreement, the
simulation model captures the imposition of those specific, quantifiable
distortions1 that were explicitly eliminated under the agreements.2 The model
captures only those changes that arise as a result of relative price changes.3 The
1
A distortion in this context refers to any policy instrument that causes a change to
the market-clearing price and quantity. One definition of distortion in this context is
“[a]ny departure from the ideal of perfect competition that interferes with economic
agents maximizing social welfare when they maximize their own. [It] Includes taxes and
subsidies, tariffs and nontariff barriers, externalities, incomplete information, and
imperfect competition.” (Alan V. Deardorff, Deardorff’s Glossary of International
Economics, found at http://www-personal.umich.edu/~alandear/glossary/, downloaded
June 8, 2003) This study explicitly considers only ad valorem tariffs and quantity
restraints on trade. However, these distortions interact with other distortions implicit in
the model, including domestic tax policy.
2 Some portions of the agreements were not in force at the time of the study
(2002-2003), and therefore, were not included as a part of the simulation analysis. Some
important examples of scheduled liberalizations that are not considered here include the
final phase out of textile and apparel quotas under the Agreement on Textiles and
Clothing (a part of the Uruguay Round) on Jan. 1, 2005; and the scheduled elimination
under NAFTA of restrictions on imports of sugar and other agricultural products
originating from Mexico.
3 The model only considers the effect on relative prices of the quantifiable trade
distortions (that is, tariffs and those non-tariff barriers that have been quantified in
publicly available sources) removed by the agreements. Unquantified policy changes,
325
purpose of the simulations is to provide a consistent and widely acceptable
framework for assessing the relative impacts of the direct liberalization
embodied in each agreement using verifiable, publicly available data.
The simulations discussed below suggest that of the five agreements
analyzed, the two multilateral agreements – the Tokyo Round and the Uruguay
Round4 – had the greatest impact on welfare. The welfare impact of the other
agreements rose with the intensity of the pre--existing trading relationship and
the magnitude of tariff cuts. NAFTA ranks as the most important, followed by
the U.S--Canada FTA and the U.S.--Israel FTA. Had the United States not
entered into the five agreements, the model suggests that welfare would have
been lower by approximately 0.6 percent of real income in 2001.
The estimated impacts produced in the simulations here are conservative
from a quantitative and a theoretical perspective. The trade policy changes
considered in the analysis are only those that have been quantified in publicly
available sources (i.e. tariff and selected non--tariff barriers). The model only
considers the effects of relative price changes attributable to trade policy
changes. As has been discussed throughout this report, trade policy might
plausibly be linked to increasing scale economies or higher productivity levels.
Because the evidence for these effects is somewhat mixed, this exercise does
not attribute changes in productivity levels or in firm scale to changes in trade
policy. Models that allow for increased scale economies and productivity
effects from trade liberalization generally suggest larger welfare gains from
liberalization.5 In chapter 8, we present a model where consumers value
product variety and trade policy induces changes in product variety. In this
chapter, however, no such changes occur to welfare through this mechanism.
3—Continued
such as agreements on trade in services in the Uruguay Round, are not included.
Therefore, the model likely understates the effect of the agreements on relative prices.
By limiting its analysis to the effect of relative price changes, the model does not take
into account economic impacts that may go beyond relative price change. For example,
trade agreements may have increased product variety, an effect discussed in chapter 8.
4
Data requirements limit the analysis to the years 1978-2001. Two of the
agreements, the Uruguay Round and NAFTA, had not been fully implemented by 2001.
For example, the Agreement on Textiles and Clothing, a part of the Uruguay Round, was
not fully implemented in 2001. The modeled effects of these agreements would have
been are relatively larger had these agreements been fully implemented by 2001.
5 Thomas F. Rutherford and David G. Tarr (“Trade Liberalization, Product Variety
and Growth in a Small Open Economy: A Quantitative Assessment,” Journal of
International Economics, vol. 56, pp. 247-272, 2002) contrast the welfare effects of trade
liberalization obtained in standard (constant-returns-to-scale) models and their model,
which includes scale economies. Rutherford and Tarr find welfare impacts many
multiples higher than those obtained in standard models.
326
Approach
The tool used to analyze the economy in the absence of liberalization is a
numeric or computable general equilibrium model calibrated to the observed
trade flows, and macro-- and microeconomic conditions of the U.S. economy
over the historical period from 1978 to 2001.6 The numeric model is a
mathematical representation of the economy, simulating the interaction of
producers and consumers where each agent maximizes its own welfare subject
to resource endowments and market prices. Resource and technological
constraints interact with trade barriers to determine overall welfare. For this
exercise resource endowments and technologies are held constant across the
policy simulations. Doing so allows for an experiment that completely controls
for shocks that are contemporaneously correlated with policy changes. Only
those impacts that are specifically (structurally) attributed to policy appear in
the simulation. Thus, the technique employed here is more akin to the ex ante
studies reviewed in chapter 4, but it is applied in an ex post analysis of the
agreements.
The motivation for using an ex ante technique for assessing past
agreements is to isolate the economywide impact of the policy of interest.
Other sources of U.S. economic change, apart from the agreements and
including those identified in chapter 4, make it difficult to isolate the effects of
trade policy changes in an economy--wide context. Ex post analysis typically
explores statistical relationships between trade policy changes and economic
outcomes. While it is often possible to isolate effects on individual sectors
facing liberalization, indirect effects are usually too difficult to isolate from
other changes occurring in the economy. It is especially difficult to trace the
effects of trade policy changes on one sector, such as apparel and other textile
products, onto other sectors, such as retail trade. The simulations presented
here rely on a particular theoretical structure of economic behavior to provide a
framework for passing the effects of trade policy changes onto the broader
economy.7 Employing such a framework is important, because sectors most
directly affected by liberalization (goods sectors) account for a relatively small
share of national output, and the much larger service sectors are often affected
indirectly.
In the simulation model, each year in the past represents a static
equilibrium in which all resource and technological relationships are calibrated
to a best estimate of the historical baseline. Yearly calibration directly
accommodates changes in population, productivity and tastes over time, as well
6 Appendix C of this report includes a technical description of the model used for the
simulations that appear in this chapter. Details of the data and construction of the social
accounts can be found in Edward J. Balistreri and Alan K. Fox, “TSCAPE: A Time
Series of Consistent Accounts for Policy Evaluation,” USITC Working Paper 2003-5-A,
2003.
7 For more details on model structure, see appendix C.
327
as macroeconomic phenomena related to business cycles. The realized tariff
reductions and phase--in periods embodied in each agreement are also directly
accommodated in the baseline calibration. The baseline equilibrium for the
U.S. economy replicates the historical series on real 1996 dollar merchandise
trade flows with specific trade partners covered by the agreements and the
world as a whole. The baseline also replicates aggregate income and other
specific series from the National Income and Products Accounts (NIPA)
published in the annual Economic Report of the President. Production
technologies are determined by using the detailed benchmark input--output
accounts published every five years by the Bureau of Economic Analysis of
the U.S. Department of Commerce (USDOC).
The model depends on a set of response parameters as well as on the
calibrated baseline data. These parameters establish the model’s behavioral
responses to price changes. A key response parameter governing model results
is the elasticity of substitution between domestic and foreign varieties of a
given commodity. Estimates of these parameters are taken from econometric
literature on international trade.8 A back--of--the--envelope calculation indicates
that an average trade elasticity of about 5, combined with the trade--weighted
average tariff reduction for all agreements of 3 percentage points (calculated in
chapter 3 of this report) might be expected to yield about a 15 percent increase
in trade flows. In comparison, the simulation results below showed about a 12
percent change in trade flows.9 Other important response relationships are
dictated by other elasticities. For example, consumers in the model are assumed
to make decisions based on Cobb--Douglas10 preferences. Firms substitute
between capital and labor according to a Cobb--Douglas technology, but use
intermediate inputs in fixed proportions to the value--added composite.
With the benchmark and response parameters established, the model can
simulate a counterfactual equilibrium in which tariff and other concessions
8
David Hummels, Purdue University, uses U.S. data on trade and trade costs to
estimate the degree to which trade flows change with changes in trade costs. The
simulation model uses Hummels’ estimates, at the 1-digit level, to map trade-policy
changes into trade-flow changes. The 1-digit estimates were obtained through personal
correspondence with David Hummels. The estimation methodology can be found in
David Hummels’ paper, “Toward a Geography of Trade Costs” (mimeo, Purdue
University, 2000).
9 The difference between the back-of-the-envelope calculation and the structural
model simulation might generally be attributed to the complexity of the modeled
economy and more realistic characterization of the actual policies. For example, the
back-of-the-envelope calculation does not track the imports diverted from rest-of-world
imports to imports from a free-trade agreement partner. This and other complexities may
act to mitigate the overall trade response. Model-based calculations are more reliable
because they can explicitly account for such complexities.
10 In a Cobb-Douglas formulation, the budget shares devoted to each good remain
constant.
328
embodied in the trade agreements are not eliminated. The general
methodology for implementing counterfactual U.S. import policy is to adopt
the rate of protection (using calculated duties) in the year prior to the
enforcement of the agreement. The removal of partner--country concessions is
also incorporated to reflect the overall impact of the agreement on trade
prices.11 The counterfactual simulations should be interpreted as “but for” the
agreement. In the but--for economy, U.S. trade barriers increase and prices
received by U.S. exporters fall. The net result of not entering the trade
agreements is restricted trade. Unlike traditional ex post analyses, this is
more an assumption than an empirical result. Essentially, the simulation
model aids in the quantification of this assumption and permits the ranking
of the relative importance of the different agreements.
Simulation scenarios were designed to take advantage of data on collected
duties and minimize qualitative assessments of what the world would have
looked like under a set of hypothetical circumstances. With only data on duties,
for example, it is not possible to establish what concessions the United States’
free--trade agreement partners might have made under the Uruguay Round but
in the absence of the U.S. trade agreement. The liberalizations were thus
cumulatively removed from the point of view of the year prior to enforcement.
This approach allowed for an analysis of the marginal effect of each
agreement, as well as the aggregate effect of all agreements that follow a
particular agreement. The central scenarios are:
1.
But--for: Uruguay Round
2.
But--for: Uruguay Round and NAFTA12
3.
But--for: Uruguay Round, NAFTA, and U.S.--Canada FTA
11
A number of different sources were used to establish the changes in export prices
that might be attributed to each agreement. J. Michael Finger, Merlinda D. Ingco, and
Ulrich Reincke, The Uruguay Round: Statistics on Tariff Concessions Given and
Received, (World Bank: Washington D.C., 1996) was used to establish the concessions
received by the United States under the Uruguay Round. For NAFTA and the
U.S.-Canada FTA direct duty data was obtained from the TRAINS database published by
the United Nations Conference on Trade and Development. Bernard D. Reams Jr., The
Trade Agreements Program of the United States: Annual Reports of the President
1957-1985: Volume 3, (Buffalo, New York: William S. Hein and Co., Inc., 1989), was
used to establish the concessions received by the United States under the Tokyo Round.
Although there was a lack of data on concessions received by U.S. exporters to Israel, an
assumption was made that export prices to Israel increased by 3 percent under the
U.S.-Israel FTA.
12 The policy changes linked to NAFTA in the exercise are only changes in Mexican
policy and changes in U.S. policy toward Mexico. Canadian policy changes and U.S.
policy changes toward Canada are attributed to the U.S.-Canada FTA.
329
4.
But--for: Uruguay Round, NAFTA, U.S.--Canada FTA, and U.S.--Israel
FTA
5.
But--for: Uruguay Round, NAFTA, U.S.--Canada FTA, U.S.--Israel
FTA, and Tokyo Round.
In the first scenario, trade barriers were set for all future years beyond 1994
at a level consistent with the tariffs and nontariff barriers measured in 1994, the
year prior to enforcement of the Uruguay Round. Trade barriers for U.S.
free--trade agreement partners remained at their baseline values; U.S.--Mexico
tariffs are implicitly unaffected by the removal of the Uruguay Round. This
scenario simulated the but--for Uruguay Agreement equilibrium. The second
scenario included the but--for Uruguay Round changes in barriers and added
the changes to the set of trade barriers between the United States and Mexico
removed in response to NAFTA. Trade barriers between the United States and
Mexico were set for all future years beyond 1993 at a level consistent with the
barriers between the United States and Mexico measured in 1993, the year
before NAFTA came into force. The second scenario simulated the but--for
NAFTA and Uruguay equilibrium.
Similarly, subsequent scenarios compounded the impacts of suppressing the
liberalization of the next previous agreement. For example, the third scenario
included all the changes in barriers from scenario 2 and added the changes to
the set of trade barriers between the United States and Canada removed in
response to the U.S.--Canada FTA. Trade barriers between the United States
and Canada were set, for all subsequent years beyond 1988, at a level
consistent with the observed barriers between the United States and Canada in
1988, the year before the Canadian agreement went into force. This
step--by--step unwinding of trade agreements facilitates analysis of the
aggregate and marginal impacts of the agreements. This approach avoids
making arbitrary assumptions about what concessions the United States might
have received during later negotiations had prior agreements not occurred. That
is, no judgment is made about the form the Uruguay Round might have taken
had NAFTA never been implemented.
Principal Finding
Within the simulation model the most relevant summary measure of the
economywide effects of the trade agreements is the simulated change in
welfare, as measured by the money--metric equivalent variation. Change in
welfare measures the income loss in 1996 dollars equivalent to eliminating the
liberalizations embodied in the agreements. Figure 7--1 shows the welfare
changes attributed to each scenario. In 2001, for example, the annual welfare
loss attributed to the but--for--Uruguay scenario (the removal of the Uruguay
Round tariff cuts) was approximately $20 billion in 1996 dollars. In the
but--for--all--agreements scenario the loss was more than $56 billion in 1996
dollars, approximately 0.6 percent of real income in 2001. The annual welfare
330
Figure 7-1
Change in welfare relative to baseline that includes trade
agreements
10
0
Billions of 1996 dollars
--10
--20
--30
--40
--50
--60
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
But-for Uruguay
But-for Uruguay and NAFTA
But-for Uruguay, NAFTA and CFTA
But-for Uruguay, NAFTA, CFTA, and US-Israel FTA
But-for Uruguay, NAFTA, CFTA, US-Israel FTA, and Tokyo
Source: Commission calculations.
losses attributed to each agreement generally rise over time for two primary
reasons. First, liberalization is gradual due to phase--in schedules embodied in
the observed duties; and second, trade accounted for a growing share of U.S.
output over the period.13
13 Note that aggregate trade in 2001 was below trade in 2000 (see Figure 7-4) in part
due to a recession. As a result, welfare losses from removal of the trade agreements are
lower in 2001 than in 2000.
331
Applying a 5 percent discount rate to the historical welfare losses
associated with not entering any of the five trade agreements produces the
calculated result that the 2001 present value of aggregate welfare loss totals
$595 billion in 1996 dollars. This aggregate welfare loss represents 0.2 percent
of the 2001 present value of the corresponding aggregate income from 1980
through 2001.14
Figure 7--2 shows a decomposition of the welfare impacts in 2001 into the
portions attributable to each agreement. The marginal effect of each agreement
was analyzed by subtracting the next most inclusive scenario. For example, the
marginal impact of the Tokyo Round Agreement in 2001 was computed by
subtracting the welfare loss under scenario 4 from scenario 5 (--$56b less
--$34b = --$22b). The welfare losses attributed to the removal of the multilateral
Uruguay and Tokyo Rounds were the largest. The losses associated with
removing NAFTA, which only includes the marginal impact of adding Mexico
to the U.S.--Canada FTA, are slightly larger than those associated with
removing the Canadian agreement. To look at North American trade as a
whole, including both Canada and Mexico, the impacts of the U.S.--Canada
FTA and NAFTA should be added together. The simulated welfare loss
associated with removing both NAFTA and the U.S.--Canada FTA in 2001 was
approximately $14 billion. The U.S.--Israel FTA had a very small relative
impact (--$0.3 billion) due to the relatively small trade flows between the
United States and Israel.
These simulation results are consistent with standard theories of
international trade. Multilateral agreements–such as the Tokyo and Uruguay
Rounds–tend to have a larger impact for two reasons. First, more trade is
covered by multilateral liberalizations, since most of the world’s goods are
traded among GATT signatory countries. Second, there are no offsetting losses
from trade diversion, again thanks to the multilateral framework of these
agreements. Turning to the bilateral agreements, the impact of NAFTA was
relatively larger than the impact of the U.S.--Canada FTA because Mexico’s
tariff cuts were so large. At the time of the establishment of the U.S.--Canada
FTA, Canada’s tariffs against U.S. exports were already relatively low. And
lastly, the impact of the U.S.--Israel FTA was the smallest both because tariffs
were already low before the agreement and Israel’s share of the U.S. market
was small.
14 The year 1980 was used as the first year of the present-value calculation because
this was the first year in which the scenario was different from the baseline (the first year
of the Tokyo Round phase-in).
332
Figure 7-2
Marginal welfare impact of removing agreements in 20011
0
Billions of 1996 dollars
-5
- 10
- 15
- 20
- 25
Uruguay
NAFTA2
CFTA
U.S.-- Israel FTA
Tokyo
1 Displays the incremental impact of reimposing the quantifiable trade restrictions
eliminated by each of the agreements. The policies are imposed on a numeric model of
the U.S. economy
2 Considers only the effect of Mexican policy changes and U.S. policy changes with
respect to Mexico
Source: USITC.
Baseline
To establish a baseline for comparing the simulated removal of trade
agreements, the model was calibrated to historical data from 1978 to 2001.15
Calibration involves establishing a complete dataset for the model that is
internally consistent with the accounting rules of the model. This process
15 Details of the data and construction of the social accounts can be found in Edward
J. Balistreri and Alan K. Fox, “TSCAPE: A Time Series of Consistent Accounts for
Policy Evaluation,” USITC Working Paper 2003-5-A, 2003.
333
imposes a set of consistency conditions that will generally fail when
combining unadjusted data from different sources. Priority was therefore
given to maintaining the integrity of data from certain sources. For example,
the aggregate NIPA series on real GDP, published in the annual Economic
Report of the President, is reproduced in the baseline model run. Figure 7--3
presents these data in a chart. The baseline data are useful for putting the
scenario results in the context of the overall size of the U.S. economy. Figure
7--3 also decomposes GDP into its labor and other--value--added components.
Labor’s value share of GDP over the series averages about 58 percent.
Other--value--added includes payments to property type income, and indirect
business taxes and non--tax liabilities.
The integrity of the merchandise trade flows and duty payments is also
maintained in the calibration process because of the focus of analysis on
detailed changes to international trade policy. These current--dollar
customs--level series are aggregated and converted into real 1996 dollars.
Combining the information from the NIPA totals and the detailed benchmark
input--output tables determined the nonmerchandise trade flows. Figure 7--4
presents aggregate real imports and real exports that are generated in the
baseline equilibrium.
Trade has become a much larger component of the U.S. economy over the
baseline period. In 1978, imports were 7 percent of GDP, growing to 16
percent of GDP in 2001. In 1978, exports were 6 percent of GDP; by 2001
they had risen to 12 percent. The dramatic relative growth in baseline trade is
important as a point of context for the scenario results. Clearly, some of the
trade growth is directly attributable to the trade agreements under analysis here,
but much of it cannot be directly linked to the measured changes in barriers. If
the growth is not attributed to the changes in tariff and nontariff barriers
embodied in the agreements, the baseline indicates significant structural
change. Figure 7--5 illustrates the relative trade growth by converting
real--baseline GDP, imports and exports into quantity indices normalized on
their respective 1978 levels.
Detailed Results
Figure 7--6 shows changes in imports and illustrates the aggregate impacts
that the agreements had on trade volumes. The aggregate change in exports
will be the same, evaluated at world prices, because of the trade balance
constraint (no change in baseline balance--of--payments position). The
agreements signed under trade promotion authority had a substantial impact on
trade volumes. Under scenario 5, in which all agreements are removed, 2001
imports (and exports) are $178 billion less than the levels that were observed in
2001. As with the welfare results, the greatest trade impacts were attributed to
the multilateral Tokyo and Uruguay Agreements. The North American
agreements also had significant impacts on trade volumes, whereas the
U.S.--Israel FTA had very little impact on aggregate trade.
334
Figure 7-3
Baseline real gross domestic product
10000
9000
Billions of 1996 dollars
8000
7000
6000
5000
Other Value Added
4000
3000
2000
Labor Income
1000
0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Edward J. Balistreri and Alan K. Fox, 2003, “TSCAPE: A Time Series of
Consistent Accounts for Policy Evaluation,” USITC Working Paper 2003--05--A (May).
335
Figure 7--4
Baseline real imports and exports
1600
1400
Imports
Exports
Billions of 1996 dollars
1200
1000
800
600
400
200
0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Edward J. Balistreri and Alan K. Fox, 2003, “TSCAPE:
A Time Series of Consistent Accounts for Policy Evaluation,”
USITC Working Paper, 2003-05-A (May)
336
Figure 7--5
Benchmark quantity indices for real income and trade
5.0
4.5
Index (1978 equals one)
4.0
GDP
Imports
Exports
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: Edward J. Balistreri and Alan K. Fox, 2003, “TSCAPE:
A Time Series of Consistent Accounts for Policy Evaluation,”
USITC Working Paper, 2003-05-A (May)
337
Figure 7-6
Change in aggregate imports relative to baseline
20
0
--20
Billions of 1996 dollars
--40
--60
--80
--100
--120
--140
--160
--180
--200
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
But-for Uruguay
But-for Uruguay and NAFTA
But-for Uruguay, NAFTA and CFTA
But-for Uruguay, NAFTA, CFTA, and US-Israel FTA
But-for Uruguay, NAFTA, CFTA, US-Israel FTA, and Tokyo
Source: Commission calculations
Although the magnitudes of trade reductions were sizeable when all of the
agreements are removed, the impacts were small relative to overall trade
growth during the same period. Referring back to Figure 7--4, imports grew a
total of $1.1 trillion from 1978 to 2001. Of this total, the model attributed 15
percent of the growth to the agreements. The other 85 percent of import and
export growth were implicitly attributed to other factors that contributed to
trade growth. Other factors may include U.S. and foreign income growth,
unilateral economic reforms in developing countries, and innovation in
transportation and communication technologies. These effects cannot be
quantified in the model without specific data or assumptions on their change
over time.
338
The aggregate results might also be summarized in terms of changes in
income. This income change can be decomposed into labor, capital, and tariff
revenue components. The simulation model has a stylized representation of the
labor market. Only one type of labor is assumed, and the market always clears
with full employment at the baseline levels. Total compensation to workers
changes, however, due to changes in the market clearing wage (relative to the
true--cost--of--living index, the numeraire). Overall, in 2001 under scenario 5,
labor income fell by 0.8 percent ($40 billion). This reduction indicated that
removal of the trade agreements reduced net demand for labor. Similarly, the
removal of agreements decreased the net return to capital, reducing
other--value--added payments by 0.7 percent ($30 billion). Offsetting these
income decreases was a gain in tariff revenues (when the agreements are
removed) totaling $50 billion in 2001 under scenario 5.
339
CHAPTER 8:
Growth in Product Variety
There are a number of ways in which economies benefit from increased
international trade. In the simulation model used in chapter 7, trade agreements
increase U.S. welfare because they lower the price of U.S. imports and raise
the price of U.S. exports.1 While relative price changes are likely the primary
benefit of trade agreements, theoretical models of international trade suggest
another important benefit–U.S. tariff reductions allow a wider variety of
products to be sold in the U.S. market. Added variety can benefit consumers if
they value having choices among multiple products. Firms buying imported
intermediate goods can also benefit from access to a wider variety of products.
Because standard models do not relate tariff reductions to greater product
variety, they may understate the benefits of trade liberalization.
This chapter documents a notable feature of recent U.S. trade
growth–growth in the number of import sources per imported commodity. In
1978, the U.S. imported from an average of 39 countries per SIC 4-digit
commodity. By 2001, the number of import sources per commodity had risen
to 58. Calculations in this chapter indicate that 2.5 percent of U.S. import
growth since 1978 can be attributed to the increased number of trading partners
per product.
There are a number of possible explanations for the growth in the number
of product-country pairs in U.S. imports.2 During the time period considered in
this report, many countries undertook significant political and economic
reforms that facilitated their wider participation in world markets.3 As
mentioned in chapter 4, technological innovations in transportation and
communication technologies have also facilitated trade growth. The analysis in
1 Such changes raise the average standard of living because increased export prices
raise average income, while decreased import prices reduce the cost of living.
2 In what follows, “product--country pair” is used to indicate imports of a specific
product originating in a specific country. For example, “computer equipment from
China” identifies a product--country pair. The chapter investigates growth in the number
of product--country pairs per product in which U.S. imports are recorded, and measures
the share of total trade growth attributable to new product--country pairs.
3 Several reforming countries are significant U.S. trading partners, including
Mexico, China, India, and Indonesia. The trade agreements considered in this study may
have had some role in helping to make reform efforts more credible. However, it is quite
likely that such reforms would have occurred, even in the absence of the trade
agreements.
341
this chapter employs an econometric model to estimate the role of tariff
reductions in increased import variety. While the statistical relationship
between tariff cuts and new import sources is weak, model estimates suggest
that between 1.3 and 3.5 new varieties, or approximately 5 to 20 percent of
growth in U.S. import variety since 1978, can be attributed to U.S. tariff
reductions.
Theoretical models of international trade developed over the last two
decades suggest that the economic benefits associated with new import sources
may be large. If buyers of imports consider goods from new import sources to
be qualitatively different than goods from existing sources, standard models
will understate the value of trade liberalization to the U.S. economy. If, on the
other hand, the goods from new sources cannot be distinguished from the
goods from existing sources, there is no benefit from the increased number of
import sources.4 In that case, the standard gains from trade, like those
measured in chapter 7, would be a more appropriate measure of welfare
changes.
This chapter employs a calibrated theoretical model to demonstrate the
possible magnitude of the gains from new varieties induced by tariff reduction.
Estimates from that exercise suggest that increased product variety may
account for as much as three-quarters of the welfare gain from U.S. tariff
reductions. Thus, standard models, which measure only the effects of relative
price change, may substantially understate the welfare gains from trade
agreements.
Theoretical Discussion
Theoretical discussions of the role of product variety in international trade
began with models by Krugman and Ethier.5 In both these models, individual
firms produce different varieties of the same product. In the Krugman model,
trade occurs because consumers wish to consume a variety of products.
Consumers’ taste for variety leads them to demand foreign varieties. In Ethier’s
4 For example, consumers might view a woman’s blouse from Mexico and a
woman’s blouse from China as the same product, or the new Chinese variety might have
been produced in Mexico at one time. In these cases, importing blouses from Mexico and
China would be no different, in a welfare sense, than importing from Mexico or China
alone. This chapter considers the possibility that new sources represent new varieties.
The exercise is intended to suggest a possible gain from trade missing in standard models
like that used in chapter 7.
5 Paul R. Krugman, “Increasing Returns, Monopolistic Competition and
International Trade,” Journal of International Economics ,vol. 9, No.4, November 1979,
pp. 469--79; and Wilfred J. Ethier, “National and International Returns to Scale in the
Modern Theory of International Trade,” American Economic Review, June 1982, vol.
72, No. 3, pp. 389--405.
342
model, having access to a greater variety of intermediate goods raises a
firm’s productivity. In both models, the economic gains from increased
variety are the reason for international trade. Romer argues that economic
models without a role for increased product variety may substantially
understate the value of international trade.6
Most theoretical models that include a role for product variety attach
varietal differences to the output of individual firms. Unfortunately, trade data
are infrequently available at the firm level, so empirical research typically
attaches varietal differences to a product’s country of origin. By assumption,
buyers of imports (consumers, firms, or both) treat electronic equipment from
Canada as an imperfect substitute for electronic equipment from Germany, and
buyers are assumed to desire imports from each source.7 This chapter follows
this convention, treating the output of each country as a distinct variety of the
good in question. This chapter focuses on product-country pairs that are new to
the U.S. market since 1978.
Several empirical applications, some of which are reviewed in chapter 4,
are relevant to the work in this chapter. Evenett and Venables decompose
growth in developing country exports from 1970 to 1997.8 This chapter
employs Evenett and Venables’ method to decompose growth in U.S. imports.
Following Schott, the chapter identifies country groupings that are most
responsible for U.S. import growth.9 Subsequent work in this chapter adapts a
model and technique proposed by Klenow and Rodgriguez-Clare, who estimate
the welfare gains from Costa Rican liberalization in the mid 1980s.10
6 Paul M. Romer, “New Goods, Old Theory, and the Welfare Costs of Trade
Restrictions,” Journal of Development Economics, vol. 43, 1995, pp. 5--38.
7 This is the Armington assumption, that goods are differentiated by their country of
origin. This treatment was first proposed in Paul Armington, “A Theory of Demand for
Products Distinguished by Place of Production.” International Monetary Fund Staff
Papers, March 1969, vol. 16, No. 1, pp. 159--78. The Armington assumption underlies
many applied trade models, including the Global Trade Analysis Project (GTAP) model
and the model used in Chapter 7 of this report.
8 Simon J Evenett and Anthony J. Venables, “Export Growth in Developing
Countries: Market Entry and Bilateral Trade Flows,” July, 2002. Presented at the
National Bureau of Economic Research Summer Research Institute. Downloaded from
the internet site http://www.nber.org/~confer/2002/si2002/venables.pdf on April 24,
2003.
9 Schott, Peter K. “Do Rich and Poor Countries Specialize in a Different Mix of
Goods? Evidence from Product--Level U.S. Trade Data,” National Bureau of Economic
Research Working Paper 8492, September 2001.
10 Peter J. Klenow and Andres Rodriguez--Clare, “Quantifying Variety Gains from
Trade Liberalization,” September 1997, Graduate School of Business, University of
Chicago. Downloaded from web page of Peter Klenow
http://www.klenow.com/QuantifyingVariety.pdf on Nov 12, 2002.
343
Data
The primary data source employed in this study is the U.S. import series
from the Department of Commerce (DOC).11 In the construction of this data,
product categories from the Trade Statistics of the United States of America
(TSUSA) and Harmonized Tariff System (HTS) were concorded to 4-digit
Standard Industrial Classification categories.12 Some part of the phenomenon
measured here may include changes in product classification systems over
time–what appears as a new product may simply represent a reclassification of
an existing product. Considerable efforts were undertaken to reconcile the two
data systems, but analysis of product variety is sensitive to the process of
reconciliation.
A number of political changes since 1978 also complicate this analysis,
including the break-up of political units like the Soviet Union, and the mergers
of political units like East and West Germany. In order to ensure a consistent
number of possible U.S. trading partners over time, geographic areas that were
unified in any time period during our sample are identified as a single trading
partner for the purposes of this analysis. Thus, for analytical purposes, the
former Soviet Republics are grouped into a single country, as are other groups
of countries that were broken apart or merged during the period 1978-2001.13
Products from political subdivisions that have their own import code in U.S.
trade statistics are treated as distinct from products exported from the parent
country.14
Historical Experience
Figure 8-1 shows annual average number of import sources per SIC 4-digit
category. In 1978, the U.S. imported from an average of 39 import sources per
SIC 4-digit commodity. By 2001, that figure had risen to 58. While import
variety has generally increased over time, Figure 8-1 reveals an interesting
aberration in the mid 1980s. Import product variety increased rapidly in the
mid-1980s, and then fell back to its long-term growth trend in the late 1980s.
The deviation from the trend appears to be connected with changes in the real
11 Because DOC collected the data under two different classificiation schemes, the
data were concorded to allow a single classification scheme. The concordance procedure
is described in Edward J. Balistreri and Alan K. Fox, “TSCAPE: a Time Series of
Consistent Accounts for Policy Evaluation,” USITC working paper 2003--5--A, 2003.
12 The United States collected data under the TSUSA classification system through
1988. Since 1989, trade data has been collected under the HTS system. Combining these
data series required an exercise of mapping products into a single classification system.
13 The former republics of Yugoslavia are treated as a single variety, as are the
combination of North and South Yemen, Israel and the West Bank/Gaza, the Czech and
Slovak Republics, Eritrea and Ethiopia, and East and West Germany.
14 So, for example, Aruba’s products are treated as distinct from the products from
the Netherlands.
344
Figure 8-1
U.S. import sources per SIC4 commodity
60
55
50
45
40
35
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Source: USITC calculations based on U.S. Department of Commerce data
exchange rate. The Federal Reserve’s price-adjusted broad dollar exchange
rate index increased by 19 percent between March 1983 and March 1985,15
increasing the real purchasing power of dollars in world markets. The same
index fell from 29 percent between March 1985 and March 1988,16 reflecting
a decline in the purchasing power of dollars. In time periods where U.S.
importers have had relatively more purchasing power, they have imported
from relatively more sources.
15 USITC calculations based on the Federal Reserve’s “price adjusted broad--dollar
index,” downloaded from Internet address
http://www.federalreserve.gov/releases/h10/Summary/indexbc_m.txt on April 23, 2003.
16 Ibid.
345
New Varieties in Trade Growth, a
Decomposition
To better understand the significance of new country-product pairs in
overall trade growth, a decomposition method proposed by Evenett and
Venables is applied to U.S. import data over the period 1978-2001. At the
4-digit SIC level, 2.5 percent of import growth can be attributed to imports
from new trading partners. Most of the new growth attributed to new
country-product pairs occurs in countries the World Bank classifies as “middle
income” countries. Countries that joined the GATT/WTO during the years
1978-2001 accounted for a larger share of import growth in new product
country pairs than countries that were either members of the GATT in 1978, or
countries that were not members of the WTO in 2001. One percent of all
import growth between 1978 and 2001 occurred in products that China began
exporting to the United States during the period.
Method
Evenett and Venables show that trade growth can be decomposed into three
components: new trade in products not traded before, growth in the trade of
products already traded, and reduced trade due to the discontinuation of trade
in some products. They suggest a further decomposition of the second category
- growing trade in products already traded. U.S. imports in already traded
products may have grown because the United States imports more from
existing sources or because the United States imports the product from new
sources. U.S. imports of existing products may also decline because some
exporters discontinue exporting to the United States. The category of interest in
this chapter is the share of trade growth that can be attributed to new exporters
of existing products.17
One part of the analysis uses country groupings to establish commonalities
among the countries that became exporters of new products to the United
States. The first country grouping emphasizes the timing of a country’s
accession to the General Agreement on Tariffs and Trade or the World Trade
Organization. A second grouping emphasizes new exporters’ level of average
income. The World Bank classifies countries into three levels of development low income, middle income, and high income.18 In this analysis, countries are
grouped according to the World Bank’s characterization of their income status
in 1999.
17 For example, in 1978, the U.S. did not import any products in the “electronic
computers” category (SIC 3571) from China. By 2001, Chinese exports accounted for 11
percent of total U.S. imports of electronic computers.
18 World Bank, “Classification of Economies by Income and Region, 2000,” World
Development Report 2000/2001: Attacking Poverty, p. 334, Oxford University Press,
New York, 2001.
346
Because the number of exporters in a given commodity varies from year to
year, Evenett and Venables use four-year averages to characterize trade at the
beginning and end of the period. In this case the first four years of data are
1978-1981, so the initial level of trade in a given product-country pair is
defined as the average annual value of trade in that product-country pair over
the years 1978-1981. The final four years of data are 1998-2001, so the
end-of-period flows are the average over these four years. Thus, in the
decomposition analysis, new product-country pairs only appear if the United
States did not import the product from a country in 1978-1981, but did so in
the years 1998-2001.
Results
Table 8-1 shows Evenett and Venables’ top-level decomposition.
Ninety-five percent of United States import growth occurred in products that
were traded throughout the period. Some products that the United States
imported in 1978-1981 were not imported in 1998-2001, and this accounts for
-0.3 percent of trade growth. Product categories that had no trade in 1978-1981
accounted for 5.4 percent of trade growth. Virtually all of this increase can be
attributed to trade in computer storage devices.19
Table 8-1
Decomposition of trade growth
Category
Share of
import growth
Continued products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued products . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent
95.0
-0.3
5.4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1100.0
1
Components do not add to total because of rounding error.
Source: U.S. Department of Commerce data and USITC calculations.
Evenett and Venables’ second level decomposition is reported in table 8-2.
Trade in existing products is decomposed according to the source countries
from which the United States imports these products. Increased trade in
existing product-country pairs accounted for 93.2 percent of the increase in
19 The listing of computer storage devices as a new product is a demonstration of the
issues that arise in concording data over time. The concordance process used in building
the data set did not identify any products that were traded in 1978 that were most
appropriately assigned to the “computer storage devices” category. Thus, for the
purposes of this study, SIC 3572 -- computer storage devices is a new product. Some
products that were traded in 1978 were mapped into SIC 3571-- electronic computers, so
SIC 3571 is considered to be an existing product.
347
overall U.S. imports. Some countries stopped exporting products that they
exported in 1978-1981, and this accounted for -0.8 percent of trade growth.
Trade growth attributable to new product-country pairs accounted for 2.5
percent of all trade growth.
Table 8-2
Decomposition of import growth in continued products
Category
Share of
import growth
Same partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discontinued partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percent
93.2
-0.8
2.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95.0
Source: U.S. Department of Commerce data and USITC calculations.
Table 8-3 provides summary measures according to the various country
groupings outlined above. Most of the U.S. import growth attributed to new
product-country pairs is from countries that the World Bank classifies as
middle income countries. Trade in new product-country pairs from middle
income countries accounts for 1.8 percent of all U.S. trade growth. Likewise,
Table 8-3
SIC share of import growth in continued products with new trade
partners
New trading partner category
Share of
import growth
Percent
Income Level
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.3
Middle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.8
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4
GATT/WTO Entry
Before 1978 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.7
1978-2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.4
After 20011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.3
All new trading partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.5
1
Includes countries which had not completed their accession by 2002 and
countries that have not acceded.
Source: U.S. Department of Commerce data and USITC calculations.
348
new entrants to the GATT/WTO account for much of trade growth due to
new product country pairs. Of the 2.5 percent trade growth attributable to
new product-country pairs, 1.4 percent has come from countries that acceded
to the GATT/WTO between 1978 and 2001.
An important source of growth in both the middle income country grouping
and the 1978-2001 GATT/WTO accession grouping is China. New products
from China account for 1.0 percent of all the growth in U.S. imports between
1978-1981 and 1998-2001. Of this 1.0 percent, half can be attributed to exports
of electronic computers (SIC 3571) from China. After China, the most
significant sources of new varieties were Indonesia, Thailand, Aruba, Vietnam
and the Soviet Union. These results are reported in table 8-4.
Table 8-4
SIC share of import growth in continued products with new trading partners, by new trading partner
New trading partner/products
Share of import
growth by
product
Total share of
import growth
Percent
China . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Electronic computers (3571) . . . . .
Telephone and telegraph
apparata (3661) . . . . . . . . . . . . .
Other products . . . . . . . . . . . . . . . . .
Indonesia . . . . . . . . . . . . . . . . . . . . . . . .
Thailand . . . . . . . . . . . . . . . . . . . . . . . . .
Aruba . . . . . . . . . . . . . . . . . . . . . . . . . . .
Petroleum refining (2911) . . . . . . . .
Other products . . . . . . . . . . . . . . . . .
Vietnam . . . . . . . . . . . . . . . . . . . . . . . . .
Former Soviet Union . . . . . . . . . . . . . .
Other new trading partners . . . . . . . . .
1.0
0.5
0.2
0.3
0.1
0.1
0.1
0.1
0.0
All new trading partners . . . . . . . . . . . .
0.1
0.1
1.0
2.5
Source: U.S. Department of Commerce data and USITC calculations.
Table 8-5 decomposes U.S. import growth in new product-country pairs by
product. Electronic computers account for the largest share of growth due to
new product-country pairs. Telephone and telegraph equipment, petroleum
refining products and various apparel articles are the products with the next
largest shares of trade growth attributable to new product-country pairs.
349
Table 8-5
SIC share of import growth in continued products with new trade
partners by product
Product/New trading partners
Share of import
growth by new
trading partner
Total share of
import growth
Percent
Electronic computers (3571) . . . . . . .
0.5
China . . . . . . . . . . . . . . . . . . . . . . . .
0.5
Other countries . . . . . . . . . . . . . . . .
0.0
Telephone and telegraph
apparata (3661) . . . . . . . . . . . . . .
0.2
China . . . . . . . . . . . . . . . . . . . . . . . .
0.2
Other countries . . . . . . . . . . . . . . . .
0.0
Petroleum refining (2911) . . . . . . . . .
0.1
Aruba . . . . . . . . . . . . . . . . . . . . . . . .
0.1
Other countries . . . . . . . . . . . . . . . .
0.0
Girls’ and children’s outerwear (2369)
0.1
Men’s and boys’ trousers and
slacks (2325) . . . . . . . . . . . . . . . . . .
0.1
Fabricated rubber products (3069) . .
0.1
Other products . . . . . . . . . . . . . . . . . . .
1.4
All new trading partners . . . . . . . . . . .
2.5
Source: U.S. Department of Commerce data and USITC calculations.
Econometrics20
There are a number of possible reasons for increased growth in the number
of U.S. import sources. Unilateral political and economic reforms in many
developing countries predated significant entry into world export markets.
Several reforming countries, including China, India, Indonesia, the former
Soviet Union, and Mexico, have significantly increased their share of U.S.
imports. Changing transportation and communication technologies also allow a
greater number of countries to participate in world markets, and to sell a
20
D.
350
For a detailed description of the econometric methods and results, see appendix
wider variety of products. The purpose of this exercise is to isolate the role
of U.S. tariff reductions as a source of increased product variety. Since most
U.S. tariff reductions over the period can be linked directly to the five trade
agreements considered, this exercise is meant to identify the impact of the
trade agreements on product variety over the time period 1978-2001.
The econometric strategy relates changes in U.S. tariff rates and freight
charges to changes in the number of import sources per commodity. The
econometric question can be summarized as, “Did products that experienced
larger U.S. tariff reductions between 1978 and 2001 experience larger increases
in the number of import sources?” The evidence presented in appendix D
suggests that the answer is yes. Estimates from the econometric model suggest
that, on average, a 1 percentage point reduction in the multilateral tariff rate on
a SIC 4-digit commodity increases the number of U.S. import sources of that
commodity by 0.3 to 0.4. The model also suggests that the net effect of
preferential tariff reductions awarded products from Israel, Canada, and Mexico
have also contributed to growth in the number of export varieties. Post
estimation calculations suggest that between 1.3 and 3.5 new varieties per
commodity can be attributed to tariff reductions. These estimates suggest that 5
to 20 percent of the growth in new product varieties can be linked to tariff
reductions.
Measuring the Economic Effects of
Increased Product Variety
In standard models like the one used in chapter 7, tariff reductions do not
induce new product-country pairs in imports. Consumers are modeled as if they
would benefit from such entry; the framework simply does not allow entry to
occur. More recent theoretic models use a framework that allows a consistent
representation of new product entry. Importers pay a fixed cost to purchase a
new variety. When tariffs fall, the reduced relative price of imported goods
leads consumers to increase their relative demand for imports, and they buy
more varieties as a result.
The Commission simulated the effects of tariff changes on a model
calibrated to match certain features of the United States economy.21 A key
feature of the calibration is that the model matches the econometric estimates, a
4 percent increase in the tariff reduces the number of import varieties from 58
to 55.22 Similar to chapter 7, the model is shocked by imposing historical
21
The model is discussed in detail in technical appendix D.
Three is chosen because it is the largest integer within the range of econometric
estimates that suggest 1.3 to 3.5 new import varieties can be attributed to tariff
reductions. The purpose of the modeling exercise is to set a reasonable upper bound on
additional gains from import variety. Thus, the largest possible integer within the range
of econometric estimates was chosen.
22
351
tariffs on a representation of the 2001 economy. In this case, the 1978
average tariff is imposed. Welfare is calculated in two circumstances, one in
which the model includes benefits from added import variety and one in
which consumers do not gain from increased import variety. The ratio of the
two estimates offers a suggestive guide to the possible magnitude of
variety-type effects.
The estimates suggest that variety effects, if present, could be important
contributors to overall welfare. When variety effects are not included in the
welfare calculation, raising U.S. tariffs to their 1978 level reduces welfare by
0.04 percent. When variety effects and relative price changes are both included,
returning to 1978 tariffs reduces welfare by 0.15 percent. Changes in import
product variety account for three-quarters of the total welfare change in the
import variety model. These estimates indicate that, if variety type effects are
present in the real economy, the estimates in chapter 7 may substantially
understate the effects of trade agreements on U.S. economic welfare.
352
APPENDIX A
Authorizing Legislation and
Federal Register Notice
A-2
APPENDIX B
Chapter 6 Technical Annex
B-2
Previous Studies
This section provides a brief review of recent ex post statistical studies that
have attempted to capture the impact of NAFTA on its North American trading
partners. At the disaggregated level, the most closely related study is that of
Romalis.1 Romalis examines the impact of the U.S. NAFTA preferences on
Canadian and Mexican shares of U.S. imports across about 6,800 commodities
traded continually between 1989 and 2000. Since his tariff preference data are
limited to the year 2000, Romalis tests whether the 2000 tariff preference had
an effect on import shares in 2000 and in previous years. In general he finds a
positive, significant effect, which grows between 1994 and 2000. Romalis
interprets this as capturing the phase--in of tariff preferences over time, and
concludes that NAFTA has had a substantial effect on North American trade.
Agama and McDaniel2 use an import demand model to exploit the
time--varying dimension of the U.S. tariff preference toward Mexico on
aggregate imports between 1989 and 2001. The authors note that this is
important because the United States extended a tariff preference to Mexico
prior to NAFTA under the GSP program, and the NAFTA preference was
phased in over time. They use the model to examine the impact of the tariff
preference on the U.S. demand for Mexican goods. The authors report a 1
percentage point rise in the preference corresponds to a 5.7 to 8.0 percent rise
in U.S. demand for goods produced in Mexico. After NAFTA was
implemented, a 1 percentage point rise in the preference resulted in an
additional 6.0 to 7.2 percent rise in the U.S. demand for goods from Mexico.
This suggests that U.S. import demand was more responsive to changes in the
tariff preference following the implementation of NAFTA. Agama and
McDaniel also use an export demand model to examine the impact of the
Mexican tariff preference toward the United States over the 1993 to 2001
period. They report that a 1 percentage point rise in the NAFTA preference
corresponds to a 4.7 to 6.3 percent rise in Mexico’s demand for goods
produced in the United States.
1 John Romalis, “NAFTA’s Impact on North American Trade,” University of
Chicago Graduate School of Business Working Paper, 2001.
2 Laurie-Ann Agama and Christine A. McDaniel, “The NAFTA Preference and
U.S.-Mexico Trade: Aggregate Level Analysis,” The World Economy, forthcoming
2003.
B-3
Krueger3 uses a gravity model to analyze the effects of membership in
preferential trade agreements on trade flows for 61 countries between 1991 and
1997. She finds little evidence that membership in NAFTA had significant
effects on North American trade at the aggregate level. However, using
qualitative analysis to examine North American trade at the industry level,
Krueger argues that trade in some individual sectors may have increased due to
NAFTA. These sectors include, among others, machinery and equipment, and
textiles and apparel.
Although Fukao, et al.,4 try to test for evidence of trade diversion from
NAFTA, their study provides additional empirical evidence on the impact of
tariff reductions on import flows. Fukao, et al., use a gravity model to examine
the impact of tariff reductions on U.S. manufactured commodity import shares
at the HS 2--digit level from 1992 to 1998. Selected commodities are also
analyzed at the HS 4--digit level over this period. The authors report that the
estimated coefficients on tariffs were negative and statistically significant for
15 commodities and conclude that reductions in tariff rates had significant
positive effects on U.S. trade for these 15 commodities.5
Two studies of the Canada--U.S. Free Trade Agreement (CUSFTA) find
evidence that trade liberalization has a significant impact on trade flows.
Trefler6 tests the impact of Canadian tariff cuts under the CUSFTA on
Canadian manufacturing imports from the United States as a share of Canadian
output. He finds that CUSFTA tariff cuts are a statistically significant
determinant of these import shares. Clausing7 uses an import demand model to
3 Ann O. Krueger, “Trade Creation and Trade Diversion Under NAFTA,” National
Bureau of Economic Research (NBER) Working Paper, December 1999.
4 Kyoji Fukao, Toshihiro Okubo, and Robert Stern, “An Econometric Analysis of
Trade Diversion,” The North American Journal of Economics and Finance, vol. 14,
No. 1, March 2003, pp. 3-24.
5 Given that U.S. tariffs against Mexico and Canada fell faster than U.S. tariffs
against the rest of the world, the authors infer that NAFTA resulted in significant trade
diversion from other competing exporters to the NAFTA partners.
6 Daniel Trefler, “The Long and Short of the U.S.-Canada Free Trade Agreement,”
NBER Working Paper No. 8293, May 2001.
7 Kim A. Clausing, “Trade Creation and Trade Diversion in the Canada-U.S. Free
Trade Agreement,” Canadian Journal of Economics, vol. 34, No. 3, 2001, pp. 676-696.
B-4
examine the responsiveness of U.S. imports from Canada to U.S. tariff
changes due to the CUSFTA. She reports that U.S.--Canadian trade is highly
sensitive to changes in tariffs. Each 1 percent point reduction in tariffs is
associated with a 9.6 percent increase in imports from Canada.8
Analytical Framework
As in Romalis’ study, a country’s share of U.S. imports in any industry is
expected to be predominantly a function of the price of that country’s imports
relative to the price of imports from other countries. For each good i, in any
year t, Mexico’s share of U.S. total imports is, thus, a function of the price of
Mexican imports relative to the average price of U.S. imports from all other
sources:
(1)
The prices of U.S. imports (PI) from any country j are made up of four key
components: the actual export price of the product (P*), the additional
markup due to transport costs (TR), the tariff (T) applied to that imported
good,9 and the exchange rate (E), which translates the foreign currency price
into U.S. dollars.
(2)
Changes in any of these four components will change the relative price of
imports from an individual country and influence its share of U.S. imports.
Any attempt to isolate the impact of trade preferences on import share,
therefore, must control for changes in the other three components.
The Commission analysis extends Romalis’ study in several ways. First,
actual data on applied tariff rates throughout the period 1989--2001 are used,
capturing both the differences in tariff preferences across goods and the gradual
8
Clausing also tests for trade diversion, but finds no evidence that it occurred.
If other non-tariff barriers, such as quotas, also exist on a particular imported
product, the tariff -equivalent of such barriers must be taken into account to get an
accurate estimate of the increase in price due to all trade barriers.
9
B-5
phase--in of preferences over time. Second, proxies for export prices from
Mexico and other countries are included, as well as measures of changes in
the peso--dollar exchange rate, and in U.S. purchasing power over imports
from other sources. Third, the import share in the previous year (lagged
import share) is included as a determinant of today’s import share. This
variable helps to control for the fact that markets do not always adjust to
policy changes immediately, and that Mexican import shares may be
historically high in some products. Fourth, the tariff itself is used as a control
variable, since in any given year, regardless of the tariff preference, Mexico
would likely have relatively smaller import shares in products where it faces
relatively highly barriers. Finally, the growth of U.S. shares of Mexican
imports in response to Mexico’s NAFTA tariff preferences is examined.
Taking the log of equations (2) and (1), and substituting (2) into (1), yields
the basic specification to be estimated. Incorporating lagged import shares
and tariff levels yields:
(3)
where: lowercase letters indicate log values; j,k=Mexico, US, j≠k; w=world;
N=dummy for post--NAFTA years.
Several conclusions from previous studies are also explored using equation
(3). Agama and McDaniel suggested that U.S. preferences toward Mexico did
significantly raise Mexico’s share of U.S. imports at the aggregate level, and
that these preferences mattered more after NAFTA than before. In the present
study, an explicit test is conducted to see if the impact of U.S. preferences
differs before and after NAFTA. Krueger suggested that any significant change
in Mexico’s share of U.S. imports was likely due to the major peso devaluation
in late 1994, rather than NAFTA. The present study allows a direct comparison
of the influence of the trade preferences relative to exchange rate changes
during this time period. Krueger also suggests that specific sectors, such as
textiles and apparel, may have been significantly impacted by the NAFTA
preferences, even if aggregate effects were negligible. The present study
estimates the effects of preferences specifically on Mexican shares of U.S.
imports of textiles and apparel, and compares the results to the impact on
manufacturing as a whole.
B-6
Data and Estimation
Equation (3) is estimated for the U.S. manufacturing sector over the period
1990--200110 for all HTS 6--digit subheadings that existed throughout the
1989--2001 period.11 Mexico’s share of U.S. imports is calculated as the ratio
of U.S. imports from Mexico to U.S. imports from the world, using customs
value for the calculations. Applied tariffs on imports from Mexico and the
world are calculated as import duties collected, divided by customs value, for
each product in each year. Transport costs are approximated by the ratio of the
c.i.f. value of imports to the customs value of imports. The U.S. NAFTA
preference toward Mexico is then the difference between the applied tariff on
world imports, and the applied tariff on Mexican imports. The use of applied
tariffs has both benefits and drawbacks. The benefit is a better measure of the
extent and magnitude of the tariff preferences phased in by a particular year.
The drawback is that applied tariffs are only available for products which the
U.S. actually imports from Mexico, which reduces the sample, though the
dataset remains quite large at about 37,000 observations.12 The introduction of
lagged import shares eliminates the initial year’s data, reducing the sample to
about 34,700.
Changes in the value of the Mexican peso to the U.S. dollar are measured
by the nominal peso/dollar exchange rate. The nominal effective exchange rate
for the U.S. measures changes in the U.S. dollar’s purchasing power with
respect to a weighted average of its trading partners’ currencies. Both exchange
rate series are taken from the International Monetary Fund’s International
Financial Statistics.13 The export prices of products from Mexico and from all
other countries are proxied by unit values. These are calculated as customs
value of imports divided by quantity. Due to aggregation problems with
10 For both the U.S. and Mexican specifications, estimation uses generalized least
squares, with fixed effects at the industry level, and a correction for heteroskedasticity.
11 Over this time period some subheadings are eliminated, while new ones are
introduced. Within the manufacturing sector, the sample of subheadings which appears
consistently throughout the period is approximately 4,300.
12 A more serious problem may be the non-random nature of the reduction in the
sample. Romalis has a similar problem, and reestimates his model correcting for this
potential bias. He finds that the correction produces negligible differences in the results.
13 The annual values used are simple averages of the monthly data.
B-7
quantity measures, it was not possible to construct consistent unit values for
imports for all sources other than Mexico. As an alternative, the unit value
measures for U.S. imports from the world (all countries including Mexico)
are used. Since some HTS 6--digit subheadings lines have multiple quantity
measures which cannot be accurately compared over the entire time period,
nor easily aggregated, these products were dropped from the sample.14 Thus,
inclusion of price measures reduced the sample to about 28,000 observations.
All Mexican trade data were taken from the United Nations Conference on
Trade and Development’s Trade Analysis and Information System (TRAINS).
Import shares, applied tariffs and preferences were all calculated as in the U.S.
analysis. Although Mexican imports from the United States and the world were
available for 1991--2000, tariffs against U.S. imports were only available for
1991, 1995, and 1999. Thus, the estimation for Mexico uses pooled data over 3
years and about 4,000 products. Since import data were only available in c.i.f.
value, it was not possible to construct a measure of transport costs or proxies
for export prices from either the United States or the world. U.S. shares of
Mexican imports in 1989 were used to capture historical differences across
products, and Mexican tariffs against the United States in 1989 were used to
capture differences in the level of historical protection across products.
14 For example, some products are reported at the 6-digit level in kilograms, number
of units, and dozens, for the period 1989-1995, and only in kilograms and dozens for
1996-2001.
B-8
Table B-1
Sector classifications and descriptions
Sector
HTS No.
Description
Agriculture
01-24
Chemicals
28-38
Footwear
41-43, 64-67
Machines
84-85
Minerals and
metals
25-27, 71-83
Misc.
manufactures
Wood products
94-96
Live animals; animal products; vegetable
products; animal or vegetable fats and oils;
prepared foodstuffs; beverages, spirits and
vinegar; tobacco and manufactured
tobacco substitutes
Products of the chemical or allied
industries
Raw hides and skins, leather, furskins, and
articles thereof; saddlery and harness;
travel goods, handbags; footwear,
headgear, umbrellas, sun umbrellas,
walking sticks, whips and parts; prepared
feathers; artificial flowers; articles of
human hair
Machinery and mechanical appliances;
electrical equipment; parts
Mineral products; natural or cultured
pearls, precious or semi-precious stones,
precious metals; base metals and articles
of base metal
Miscellaneous manufactured articles
44–49
Plastics
39-40
Textiles and
apparel
Transport
50-63
Other
68-70, 90-93,
97-99
86-89
Wood and articles of wood; wood charcoal;
cork and articles of; pulp of wood or of
other fibrous cellullosic material; waste and
paperboard
Plastics and plastic articles; rubber and
rubber articles
Textiles and textile articles
Vehicles, aircraft, vessels and associated
transport equipment
Articles of stone, plaster, cement,
asbestos, mica or similar material; ceramic
products; glass and glassware; optical,
photographic, cinematographic,
measuring, checking, precision, medical or
surgical instruments and apparatus; clocks
and watches; musical instruments and
parts; arms and ammunition; parts and
accessories thereof; works of art,
collectors’ pieces and antiques; special
classification provisions; temporary
legislation
Source: USITC aggregation. Aggregation and descriptions based on the
Harmonized Tariff Schedule of the United States Annotated 2003, Revision 1,
http://dataweb.usitc.gov/scripts/tariff/toc.html, downloaded March 17, 2003.
B-9
Table B-2
Explaining Mexican shares of U.S. imports: Manufacturing sector,
1989-20011
(1)
(2)
(3)
(4)
7.45**
(19.45)
7.36**
(19.33)
3.89**
(9.24)
2.09**
(2.80)
Post NAFTA tariff
Preference . . . . . . . . . . . . . . . .
--
--
--
2.37**
(2.96)
Tariff level3 . . . . . . . . . . . . . . . .
--
--
-3.08**
(-6.71)
-2.47**
(-4.89)
Post NAFTA tariff level . . . . . .
--
--
--
-1.97**
(-2.64)
Transport costs4 . . . . . . . . . . .
-9.96**
(-14.64)
-10.04**
(-14.74)
-6.69**
(-12.37)
-6.67**
(-12.35)
Lagged import share . . . . . . . .
--
--
0.21**
(76.51)
0.21**
(76.15)
Peso/dollar exchange rate . . .
--
0.27**
(9.88)
0.12**
(3.68)
0.11**
(3.00)
Mexican export price5 . . . . . . .
--
--
-0.14**
(-11.64)
-0.14**
(-11.63)
Nominal effective exchange
rate6 . . . . . . . . . . . . . . . . . . . . . .
--
-0.01**
(-6.04)
-0.02**
(-20.24)
-0.02**
(-19.38)
World export price5 . . . . . . . . .
--
--
-0.03**
(-2.78)
-0.03**
(-2.80)
Year dummies . . . . . . . . . . . . .
yes
no
no
no
Industry dummies7 . . . . . . . . .
yes
yes
yes
yes
Number of observations. . . . .
R2 . . . . . . . . . . . . . . . . . . . . . . . .
F-statistic . . . . . . . . . . . . . . . . .
37,255
0.15
62.42**
37,255
0.15
69.00**
27,809
0.41
195.35**
27,809
0.41
191.90**
Tariff preference2 . . . . . . . . . .
1 All variables in logs. Statistical significance levels of 1%, and 5% , shown by ** and
*, respectively.
2 Applied tariff on U.S. imports from world-applied tariff on U.S. imports from Mexico.
3 Applied tariff on Mexico=import duties/customs value.
4 The c.i.f. margin in percent. Calculated as c.i.f. import value/customs value.
5 Unit values=customs value/quantity.
6 Decrease equals depreciation of peso.
7 Constructed at the 2-digit HTS level.
Source: USITC.
B-10
Table B-3
Explaining Mexican shares of U.S. imports: Apparel and textiles
sectors, 1989-20011
Textiles and
Apparel
Apparel
Textiles
0.31
(0.26)
4.98**
(4.10)
-2.99**
(-3.71)
-0.12
(-0.14)
-9.51**
(-14.79)
0.15**
(28.43)
-0.03
(-0.28)
-0.36**
(-9.34)
2.92*
(2.00)
5.11**
(3.39)
1.83
(1.64)
-0.46
(-0.34)
-18.07**
(-4.75)
0.18**
(13.02)
0.49**
(2.78)
-0.01
(-0.14)
-2.19
(-0.99)
2.03
(0.88)
-8.23**
(-6.94)
1.03
(0.87)
-8.91**
(-14.28)
0.13**
(23.01)
-0.22 {
(-1.70)
-0.47**
(-11.13)
Industry dummies8 . . . . . . .
-0.01**
(-2.97)
0.25**
(-2.97)
yes
-0.01
(-1.36)
-0.28**
(-3.92)
yes
-0.01*
(-2.54)
0.45**
(10.13)
yes
Number of observations. . .
R2 . . . . . . . . . . . . . . . . . . . . . .
F-statistic . . . . . . . . . . . . . . .
6118
0.37
156.03**
2153
0.45
158.34**
3965
0.38
114.59**
Tariff
preference2
........
Post NAFTA tariff
Preference . . . . . . . . . . . . . .
Tariff level3 . . . . . . . . . . . . . .
Post NAFTA tariff level . . . .
Transport costs5 . . . . . . . . .
Lagged import share . . . . . .
Peso/dollar exchange rate .
Mexican export price6 . . . . .
Nominal effective exchange
rate7 . . . . . . . . . . . . . . . . . . . .
World export price6 . . . . . . .
1 All variables in logs. Textiles and Apparel is defined as section 11 of the U.S. HTS;
apparel is HTS 61 and HTS62. Statistical significance levels of 1%, 5% , and 10% shown by
**, *, and {, respectively.
2 Applied tariff on U.S. imports from world-applied tariff on U.S. imports from Mexico.
3 Applied tariff on Mexico=import duties/customs value. Divergent responses to tariff in
apparel and textiles may be due to presence of quantitative restrictions on apparel prior to
NAFTA.
4 The c.i.f. margin in percent. Calculated as c.i.f. import value/customs value.
5 Unit values=customs value/quantity. Note that in apparel, Mexican unit values are
highly correlated with world unit values. If world unit values are omitted, a strong negative
response to Mexican unit values appears (with other results unchanged).
6 Decrease equals depreciation of peso.
7 Constructed at the 2-digit HTS level.
Source: USITC.
B-11
Table B-4
Explaining US shares of Mexican imports: Manufacturing sector,
1991-19991
(1)
(2)
Tariff preference2 . . . . . . . . . . . . . . . . . . . . . .
0.37*
(2.16)
0.44**
(2.73)
Tariff level in 19913 . . . . . . . . . . . . . . . . . . . . .
--
-0.84**
(-3.51)
Import share in 1991 . . . . . . . . . . . . . . . . . . . .
--
0.49**
(25.03)
Peso/dollar exchange rate . . . . . . . . . . . . . . .
-0.06*
(-2.22)
-0.05*
(-2.39)
Real effective exchange rate4 . . . . . . . . . . . .
-0.002**
(-3.98)
-0.002**
(-4.66)
Industry dummies5 . . . . . . . . . . . . . . . . . . . . .
yes
yes
Number of observations. . . . . . . . . . . . . . . . .
R2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-statistic . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,161
0.09
12.20**
12,049
0.29
50.41**
1 All variables in logs. Statistical significance levels of 1% and 5% , shown by ** and *,
respectively.
2 Applied tariff on Mexican imports from world-applied tariff on Mexican imports from
US.
3 Applied tariff on US=import duties/customs value in 1991.
4 Decrease equals depreciation of peso.
5 Constructed at the 2-digit HTS level.
Source: USITC.
B-12
APPENDIX C
Chapter 7 Technical Annex
C-2
TECHNICAL APPENDIX
Simulation Model Used in Chapter 7 for
Analysis of the Agreements Signed
Under Fast-track Authority
Introduction
The tool used to analyze the economy in the absence of fast-track
liberalizations is a numeric general equilibrium model calibrated to the
observed trade flows and to macro- and microeconomic conditions of the U.S.
economy over the historical period from 1978 to 2001.1 The numeric model is
a mathematical representation of economic scarcity and exchange. Resource
and technological constraints interact with policy distortions to limit overall
welfare. For this exercise, resource endowments and technologies are held
constant across the policy simulations. This generates a clean numeric
experiment that controls for shocks that are contemporaneously correlated with
policy changes. Only those impacts that are specifically (structurally) attributed
to policy appear in the simulation. Thus, the technique employed is more akin
to an ex ante technique applied to an ex post analysis of the agreements.
Model Description
General equilibrium models simulate interactions among producers and
consumers within an economy in markets for goods, services, labor, and
physical capital. The distinguishing feature of the general equilibrium approach
is its economywide coverage and multisectoral nature. The model employed
here explicitly accounts for upstream and downstream production linkages,
intersectoral competition for labor and capital, and international price changes.
Currently the model contains no intertemporal linkages; each year is solved as
an independent static equilibrium. The key elements of the model can be
divided into four components that define the behavioral relationships: final
demand behavior, production technology, factor supplies, and the trade
equilibrium.
1
Details of the data and construction of the social accounts can be found in Edward
J. Balistreri and Alan K. Fox, “TSCAPE: a Time Series of Consistent Accounts for
Policy Evaluation,” USITC working paper 2003-5-A, 2003.
C-3
Final Demand Behavior
The model considers three separate components of domestic final demand:
household consumption, government demand, and investment demand.
Household consumption is dictated by Cobb-Douglas utility over each product.
The other components of final demand are fixed exogenously at their baseline
levels; real government spending and investment are held constant. Household
consumption is subject to a budget constraint equal to the sum of factor
incomes, net capital flows, and tariff revenues, less investment and government
spending.
Holding government spending fixed is consistent with welfare analysis
under the assumption of separability of private consumption and publicly
provided goods in the household utility function. The separability assumption is
necessary in the absence of information about the total net benefit associated
with government provision of public goods. The model assumes that changes
in government outlays (due to changes in tariff policy) are lump-sum
redistributed to households. Using distortionary tax instruments (such as labor
tax rates) to redistribute additional tariff revenues might decrease or increase
the estimated welfare impacts in the scenarios. This depends on the marginal
cost of public funds generated by the tax instruments, and the tariffs, in
question.2
Holding aggregate investment constant in the specification abstracts from
issues of substitution between present and future consumption. This assumption
is appropriate for static welfare comparisons, but might seem awkward in an
analysis that covers multiple time periods. The analysis here, however, is a
series of static equilibria, not a dynamic model that considers capital
accumulation. This approach might best be described as a recursive-static
exercise. In each time period the capital stock is assumed fixed. Although
beyond the scope of analysis here, relaxation of these assumptions might reveal
important insights into the adjustment dynamics associated with trade policy.
Production Technology
Production technology is modeled using a nested constant elasticity of
substitution (CES) value- added function.3 Figure C-1 illustrates the production
technology. At the bottom of the figure, inputs are combined to produce
sectoral output Xj . In the value added nest, capital and labor substitute for one
another at a rate fj . Domestic outputs of commodity i produced by sector j, Dji ,
2 See Charles L. Ballard and Don Fullerton, “Distortionary Taxes and the Provision
of Public Goods,” Journal of Economic Perspectives, vol. 6, no. 3, pp. 117-131, 1992.
3 For an introduction to CES production functions, see ch. 9 of P. R. G. Layard and
A. A. Walters, Microeconomic Theory (New York: McGraw-Hill, 1978);, and ch. 9 of E.
Silberberg, The Structure of Economics (New York: McGraw-Hill, 1990);, and ch. 9 of
J. W. Chung, Utility and Production Functions: Theory and Applications (Cambridge,
MA: Blackwell Publishers, 1994).
C-4
Figure C-1
Production in the USITC model
are produced in fixed proportions according to the make coefficients in the
social accounts. In general, the predominant output for a sector will be in its
corresponding commodity, but some sectors will produce other commodities
(i.e., the Oil and Gas Extraction industry produces significant amounts of the
commodity Electric, Gas, and Sanitary Services, because some natural gas
extraction facilities directly produce delivered natural gas to customers). The
structure employed here accommodates details on both industries and
commodities embedded in the “make” accounts available in the TSCAPE
data series.
Factor Supplies
Factors of production–labor and capital–are assumed to be in fixed supply.
This treatment is appropriate, because the model is not focused on aggregate
employment, dynamic adjustment, or domestic tax issues. A single type of
generic labor unit is assumed, and the supply of labor is fixed based on the
observed value of labor payments for each year in the series. Similarly, capital
supply is fixed at its observed value (based on capital payments) for each year
in the series. This assumption might be defensible if the policy changes under
analysis are expected to have a negligible impact on aggregate capital stocks.
C-5
Trade Equilibrium
Consistent with an Armington formulation of trade, region specific
varieties of each commodity compete with the domestic variety.4 For the
analysis of trade agreements signed under Fast-track Authority, imports and
exports were distinguished by four trade partners: Canada, Mexico, Israel, and
ROW (rest of world). Thus the four regional import varieties of a commodity
combine with the domestic variety of that commodity at a constant elasticity of
substitution. The resulting output is the composite commodity Ai , which is
available for domestic absorption.5 The first panel of Figure C-2 illustrates the
Armington aggregation of imports of commodity i. The figure is structured
such that inputs enter the bottom and outputs are at the top. The parameter si
controls the elasticity of substitution between domestic and imported goods.6
Figure C-2
Product and commodity structure
4 See Paul S. Armington, “A Theory of Demand for Products Distinguished by Place
of Production,” IMF Staff Papers, vol. 16, Mar. 1969, pp. 159-76.
5 Domestic absorption is the measure of both intermediate and final demand for a
product.
6 This σ is often referred to as the “Armington” elasticity, see Paul S. Armington, ”A
Theory of Demand for Products Distinguished by Place of Production,” IMF Staff
Papers, vol. 16, (Mar. 1969), pp. 159-76.
C-6
U.S. commodity output is illustrated in the right panel of figure C-2. Di
represents total output of commodity i. Total output Di is then disaggregated
into domestic market supply (DDi ) and international market supply (EXi,r )
according to a constant elasticity-of-transformation (CET) function. The CET
parameter τi controls the export supply response.
Response Parameters
In addition to establishing the baseline data (TSCAPE), the model depends
on a set of response parameters. These parameters establish behavioral
responses to price changes. A key response parameter governing model results
is the elasticity of substitution between domestic and foreign varieties of a
given commodity. Estimates of these parameters are taken from econometric
literature on international trade.7
7
David Hummels (Professor of Economics, Purdue University) uses U.S. data on
trade and trade costs to estimate the degree to which trade flows change with changes in
trade costs. The simulation model uses Hummels’ estimates, at the one-digit level, to
map trade policy changes into trade flow changes. The one-digit estimates were obtained
through personal correspondence with David Hummels. The estimation methodology can
be found in David Hummels’ paper, “Toward a Geography of Trade Costs” (Mimeo,
Purdue University, 2000).
C-7
APPENDIX D
Chapter 8 Technical Annex
D-2
This technical appendix contains the details of the calculations reported in
chapter 8. Two technical exercises were undertaken in chapter 8: an
econometric study of the effect of tariff and other trade cost changes on import
variety, and a simulation exercise that measures welfare changes in an
economic model in which import variety is endogenous to the level of the
tariff. The primary purpose of the simulation exercise is to demonstrate the
relative magnitude of two sources of welfare gains from trade liberalization,
relative price changes and the entry of new product varieties.
The first portion of the technical summary outlines the econometric
procedure and characterizes the regression results. Detailed econometric results
are reported in tables D3-D6. The second section of the technical appendix
describes the model used to measure welfare changes associated with increased
product variety.
Econometrics
Methodological Approach
The econometric model is straightforward. It relates changes in the number
of import sources in a given commodity with changes in tariff levels and in
freight costs facing that commodity. Estimated coefficients on changes in tariff
rates provide an estimate of how tariff changes are linked to changes in the
number of import sources per commodity. A regression constant measures the
number of new sources per commodity that are not linked to changes in tariffs
or freight charges.
The econometric specification is as follows:
where ∆Countk is the change in the number of U.S. import sources in
commodity k between 1978 and 2001, α is a regression constant, ∆tariffk and
are ∆freightk changes in the measured ad valorem tariff and freight rates for
commodity k, and εk is a randomly distributed error term.1 The regression
coefficients, β1 and β2, are estimates of the degree to which changes in
tariffs and freight rates explain changes in the number of import sources per
commodity.
Implicit in the estimating strategy defined in equation 1 is the hypothesis
that no variables correlated with tariffs and freight charges are excluded from
the regression. If reductions in non-tariff barriers have increased product
variety, and non-tariff barriers are positively correlated with tariffs, the
1
The error is assumed to be heteroskedastic. The regression procedures use the
White estimation technique to account for heteroskedasticity.
D-3
econometric specification in equation 1 will overstate the significance of
tariff changes in explaining changes in product-country pairs. Since
comprehensive measures of non-tariff barriers are not readily available,
equation 1 is estimated over subsets of the products. Estimates for
agricultural and textile and apparel sectors are suspect, as these sectors were
likely to have been affected by quantitative restrictions. Since mining
products are less likely to be differentiated in a manner consistent with the
theories of product variety,2 estimates of increased import variety in mining
sectors are estimated separately as well. Most of the analysis is done on the
subsample of products that include manufactured goods other than textiles
and apparel. Import variety growth was slightly faster in this subsector,
which saw an average increase of 20.5 new product-country pairs per
commodity group. The average increase over all sectors was 19.1.
The initial econometric specification treats entry decisions by all exporters
as equivalent. It is possible that particular groups of countries are more or less
responsive to changes in tariff and freight costs. In order to investigate these
hypotheses, we group countries as above, using income per capita and dates of
GATT/WTO accession. Equation 1 is then estimated over the sub-samples of
the data defined by the country-groupings.
Results
Table D-1 shows the relationship between tariff cuts and growth in
product-country pairs for two samples of the data. The table reports the effect
of a one percent increase in assorted trade costs on the estimated number of
new varieties. For example, column two shows that a one percent increase in
the multilateral tariff rate on a commodity reduces the number of imported
product-country pairs in that commodity by 0.41. Because tariffs were reduced
in most commodities, this estimate suggests that tariff reductions increased the
number of product-country pairs in U.S. imports.
Similar estimates across subsamples of countries indicates that growth in
new product-country pairs was most sensitive to tariff reductions among
countries that became members of the GATT/WTO during the period
1978-2001.3 Similarly, growth in the number of product-country pairs imported
from countries the World Bank classifies as middle income countries were
most significant. However, the statistical relationships between trade cost
reductions and growth in the number of product-country pairs remained weak
across multiple estimating equations.
2 See James E. Rauch 1999, “Networks Versus Markets in International Trade”
Journal of International Economics, 48(1) pp 7-35.
3 See tables D-5 and D-6 for details.
D-4
Table D-1
Trade cost changes and growth in imported SIC 4-digit productcountry pairs, 1978-2001
Change in number of imported
product-country pairs
All products
Due to 1 percent increase in:
Multilateral tariff level . . . . . .
Freight costs . . . . . . . . . . . . .
Tariff on imports from
Israel . . . . . . . . . . . . . . . . . .
Manufacturing other
than textiles and
apparel
-0.41
-0.34
1-0.17
1-0.11
0.44
0.32
Tariff on imports from
Canada . . . . . . . . . . . . . . . .
10.04
10.21
Tariff on imports from
Mexico . . . . . . . . . . . . . . . . .
-0.73
-0.55
1
Not statistically different from zero at conventional levels. See table D-3 .
Source: U.S. Department of Commerce data and USITC calculations.
A straightforward post-estimation calculation translates the estimated
statistical relationships into estimates of induced growth in the number of
product-country pairs. The first column of table D-2 shows the estimated
response of the number of product-country pairs in imports to a 1 percent
increase in each trade cost measure. The second column of table D-2 shows the
average change in each of the trade cost changes over the period 1978-2001.
The final column reports the product of the numbers in the first two columns,
this is the estimate of the number of new product-country pairs attributable to
each of the trade cost changes. In manufacturing sectors other than textiles and
apparel, the average increase in the number of product-country pairs was 20.54.
On average, reductions in the multilateral rate appear to have been responsible
for 1.32 (about 6 percent) of the new product-country pairs. Preferential tariff
reductions given to Mexico, Israel, and Canada had offsetting effects that
produced virtually no net impact.
Similar calculations across a range of specifications indicate that tariff
reductions were responsible for 3.5 new varieties, at most. The range of
estimates suggests that approximately 5 to 20 percent of the growth in the
number of new product country pairs can be attributed to tariff reductions.
Factors other than measured trade cost reductions appear to have been quite
important. Developing country economic reforms may well have been a more
significant cause of growth in U.S. import product variety.
D-5
Table D-2
Explaining the growth of new product-country pairs in U.S.
imports, 1978-20011
Average change in number of import sources:
20.54
Multilateral tariff . . . .
Freight costs . . . . . . .
Tariff on imports from
Israel . . . . . . . . . . .
Tariff on imports from
Canada . . . . . . . . .
Tariff on imports from
Mexico . . . . . . . . . .
Estimated
response to Average change
in trade costs
trade cost
changes
1978-2001
-0.34
-3.89
2-0.11
-1.97
New
product-country
pairs attribute to
trade cost
changes
1.32
0.23
0.32
-2.95
-0.93
20.21
-5.85
-1.23
-0.55
-3.97
2.18
1
For subsample of industries that excludes agricultural products, mining
products and textiles and apparel.
2 Not statistically different from zero at conventional levels. See table D-3.
Source: U.S. Department of Commerce data and USITC calculations.
D-6
Detailed Econometric Tables
Table D-3
Regression of import variety changes on trade cost changes for all
sectors and for industry subsectors1
Commodities
included in
sample
Constant . . . . . . .
Change in
multilateral
tariff6 . . . . . . . .
freight costs7 .
Israel tariff . . . .
Canada tariff . .
Mexico tariff . .
all SIC 4
sectors
agricultural
goods2
mining
products3
textiles
and
apparel4
manufacturing
other
than
textiles
and
apparel5
15.20**
(1.22)
2.19
(3.13)
-8.15
(5.38)
26.60
(5.75)
18.97**
(1.14)
-0.41**
(0.15)
-0.17
(0.17)
0.44**
(0.11)
0.04
(0.20)
-0.73**
(0.15)
1.56
(1.06)
0.06
(0.23)
0.77
(0.53)
-0.90
(0.46)
-1.03
(1.01
43.14**
(13.97)
-0.79{
(0.41)
-40.90*
(13.47)
-0.49
(1.03)
-5.22
(4.87)
0.77
(0.70)
0.61
(1.07)
0.83{
(0.43)
0.54
(0.54)
-1.64**
(0.46)
-0.34*
(0.16)
-0.11
(0.23)
0.32**
(0.10)
0.21
(0.21)
-0.55**
(0.18)
Number of
observations. . . .
R2 . . . . . . . . . . . . .
F-statistic . . . . . .
388
29
19
39
301
0.10
0.12
0.57
0.29
0.04
12.97**
1.51
7.4**
3.21*
5.73**
1 Statistical significance levels of 1%, 5%, and 10% shown by **, *, and {,
respectively.
2 Products with SIC4 classification numbers less than 1000.
3 Products with SIC4 classification numbers 1000-1499.
4 Products with SIC4 classification numbers 2200-2399.
5 Products with SIC4 classification numbers above 2000, except for textiles and
apparel sectors.
6 Calculated as (Collected duties - duties collected on imports from Israel,
Canada and Mexico)/(Value of imports - Value of imports from Israel, Canada and
Mexico).
7 Calculated as (CIF value - customs value)/ CIF value.
D-7
Table D-4
Regression of import variety changes on trade cost changes for
subsamples of regressors1
Constant . . . . . . . . . . . . . . . .
Change in
multilateral tariff2 . . . . . . .
freight costs3 . . . . . . . . . .
19.90**
(1.06)
19.66**
(1.01)
18.97**
(1.14)
-0.16
(0.16)
-0.17
(0.16)
-0.11
(0.23)
-0.34*
(0.16)
-0.11
(0.23)
0.32**
(0.10)
0.21
(0.21)
-0.55**
(0.18)
301
0.003
1.06
301
0.004
0.68
301
0.04
5.73**
Israel tariff . . . . . . . . . . . .
Canada tariff . . . . . . . . . .
Mexico tariff . . . . . . . . . . .
Number of observations. . .
R2 . . . . . . . . . . . . . . . . . . . . . .
F-statistic . . . . . . . . . . . . . . .
1 Sample includes only manufactured goods other than textiles and apparel.
Statistical significance levels of 1%, 5%, and 10% shown by **, *, and {,
respectively.
2 Calculated as (Collected duties - duties collected on imports from Israel,
Canada and Mexico)/(Value of imports - Value of imports from Israel, Canada
and Mexico).
3 Calculated as (CIF value - customs value)/ CIF value.
D-8
Table D-5
Regression of import variety changes on trade cost changes for
subsamples of countries defined by date of GATT/WTO accession1
Dates of GATT/WTO
accession
pre-1978
Constant . . . . . . . . . . .
Change in
multilateral tariff2 . .
freight costs3 . . . . .
Israel tariff . . . . . . .
Canada tariff . . . . .
Mexico tariff . . . . . .
Number of
observations. . . . . . . .
R2 . . . . . . . . . . . . . . . . .
F-statistic . . . . . . . . . .
1978-2001
post-2001
all
countries
9.87**
(0.67)
6.47**
(0.40)
2.62**
(0.24)
18.97**
(1.14)
-0.13
(0.10)
-0.07
(0.12)
0.12{
(0.07)
0.14
(0.12)
-0.33**
(0.11)
-0.20**
(0.05)
-0.01
(0.08)
0.17**
(0.03)
0.05
(0.06)
-0.15*
(0.06)
-0.02
(0.03)
-0.04
(0.04)
0.03
(0.02)
0.03
(0.04)
-0.07*
(0.03)
-0.34*
(0.16)
-0.11
(0.23)
0.32**
(0.10)
0.21
(0.21)
-0.55**
(0.18)
301
0.04
3.17**
301
0.05
6.20**
301
0.02
2.20{
301
0.04
5.73**
1 Sample includes only manufactured goods other than textiles and apparel.
Statistical significance levels of 1%, 5%, and 10% shown by **, *, and {,
respectively.
2 Calculated as (Collected duties - duties collected on imports from Israel,
Canada and Mexico)/(Value of imports - Value of imports from Israel, Canada
and Mexico).
3 Calculated as (CIF value - customs value)/ CIF value.
D-9
Table D-6
Regression of import variety changes on trade cost changes for
subsamples of countries defined by levels of development1
Income grouping,
2001
Low
Income
Middle
Income
High
Income
All
countries
Constant . . . . . . . . . . .
3.45**
(0.32)
11.94**
(0.66)
3.58**
(0.40)
18.97**
(1.14)
-0.02
(0.05)
-0.02
(0.06)
0.01
(0.03)
0.06
(0.06)
-0.13*
(0.05)
-0.29**
(0.09)
-0.06
(0.14)
0.24**
(0.06)
0.12
(0.12)
-0.25*
(0.10)
-0.03
(0.05)
-0.03
(0.06)
0.06
(0.04)
0.04
(0.05)
-0.18**
(0.05)
-0.34*
(0.16)
-0.11
(0.23)
0.32**
(0.10)
0.21
(0.21)
-0.55**
(0.18)
Change in
multilateral tariff2 . .
freight costs3 . . . . .
Israel tariff . . . . . . .
Canada tariff . . . . .
Mexico tariff . . . . . .
Number of
observations. . . . . . . .
R2 . . . . . . . . . . . . . . . . .
F-statistic . . . . . . . . . .
301
301
301
301
0.02
0.04
0.04
0.04
1.43
5.77**
3.56**
5.73**
1 Sample includes only manufactured goods other than textiles and
apparel. Statistical significance levels of 1%, 5%, and 10% shown by **, *, and
{, respectively.
2 Calculated as (Collected duties - duties collected on imports from Israel,
Canada and Mexico)/(Value of imports - Value of imports from Israel, Canada
and Mexico).
3 Calculated as (CIF value - customs value)/ CIF value.
Description of simulation model
The model is a simplified version of the model proposed by Klenow and
Rodriguez-Clare (KRC).4 There is fixed cost of importing a new variety, and
the fixed cost varies over varieties. Those varieties with the lowest fixed costs
are imported, while others are not. When tariffs are raised to their 1978
average level, the number of imported varieties available in the United States
falls. Because consumers value product variety, removing the agreements
(returning to 1978 tariffs) has a more negative impact than it would if the
model did not allow tariffs to affect the level of product variety.
4 Peter J. Klenow and Andres Rodriguez--Clare, “Quantifying Variety Gains from
Trade Liberalization,” September 1997, Graduate School of Business, University of
Chicago. Downloaded from web page of Peter Klenow
http://www.klenow.com/QuantifyingVariety.pdf on Nov 12, 2002.
D-10
The model used here differs from the KRC model in one regard - the
treatment of intermediate goods. In KRC, increased variety in intermediate
products raised domestic productivity; there are no such spillovers in this
model. KRC apply their model to a substantial liberalization of Costa Rican
imports. Given Costa Rica’s size and level of development, a model that
attributed productivity gains to increased import variety in intermediates is
appropriate. Such stories are less appropriate for the United States. In this
model, only consumer gains from import variety are considered. The model
used here also assumes only a single factor of production, labor, whereas KRC
model includes a (relatively unimportant) role for capital.
Like the standard model explained in chapter 7 and appendix C, the
economic model considered here is calibrated to match certain features of the
U.S. economy. A model experiment considers how the economy might respond
to a reimposition of the U.S. tariffs that were in place in 1978. The model
outlined here matches only broad outlines of the U.S. economy, such as the
share of imports in expenditure, the level of tariffs imposed, and the changes in
the tariffs. The model described in appendix C captures extensive detail about
the U.S. economy, including input-output relationships and partner country
trade relationships. The model used in this section is only intended to make a
demonstrative point, and leaves the construction of a more detailed model for
subsequent research.
The demonstrative point made below is that models with a role for product
variety suggest larger welfare gains from tariff reductions, and larger welfare
losses from tariff increases. The point has been made in the theoretical
literature by KRC and by Romer.5 This exercise is intended as a demonstration
of the theoretic point, using an illustrative example based on U.S. data. The
simulation indicates that, if consumers value access to an increased variety of
imported goods, increased product variety may account for as much as 3/4 of
the total welfare increase associated with tariff liberalization.
Model Details
The reader is referred to Klenow and Rodriguez-Clare for a detailed
description of the model. This model simplifies from the KRC model by
assuming the share of intermediates and capital in production (a) is equal to
zero. The economy contains two kinds of goods, a nontradeable good and a
tradeable good. Consumers in the model have CES preferences over varieties
of the tradeable good. There is a single domestic variety of the tradeable good.
Importers of the tradeable good must employ a fixed amount of labor to
undertake the activity of importing. World prices are taken as given, so changes
in U.S. tariffs affect the prices paid by U.S. consumers, but not the prices that
foreign producers receive. Tariff revenues are refunded to consumers lump
sum, and they treat this revenue as income.
5 Romer,
Paul M. (1994). “New Goods, Old Theory, and the Welfare Costs of Trade
Restrictions,” Journal of Development Economics, vol. 43, pp. 5--38.
D-11
Given these assumptions and those outlined in KRC, the model can be
summarized as a system of equations. Given the models assumptions about
firm and consumer behavior, the price consumers pay for variety j (hj) is
determined by
D2
where τ is the tariff applied to imports and σ is the elasticity of substitution
between varieties of the tradeable good. The price index of the tradeable
good takes the form:
D3
Real U.S. income (I) can be written as:
D4
where L is the supply of labor, β the share of the tradeable good in
consumption, and N the number of traded varieties.
Product j is imported if revenues cover the fixed cost (Fj) of importing
product j:
D5
and Fj varies over imported products j in the following manner
D6
where F0 and µ are values to be determined in calibration.
Equilibrium utility (U) is conditional on equilibrium income (I), prices (P),
and the share of tradeables in utility(β). Equilibrium P is a function of the
equilibrium number of import varieties (N) and the tariff (τ). Utility is the
welfare measure of interest, and is calculated as follows.
D-12
D7
The Simulation Experiment
As in the simulation experiment in chapter 7, the model is used to measure
the effect of imposing 1978 tariffs on a representation of the 2001 economy.
Under the assumption that the model of economic behavior is correct, this type
of experiment produces a simulated environment that represents the world as it
would have existed had the U.S. not reduced its tariffs. The (simple) average
tariff on 4 digit commodities in 2001 was 2.7 percent. In 1978, that value was
7.1 percent. Econometric evidence outlined in chapter 8 suggests that these
tariff cuts induced import growth of between 1 and 3.5 new varieties. The
model is calibrated so that the simulated tariff increase from 2.7 to 7.1 percent
eliminates 3 varieties from the import bundle.6
Calibration Details
The model is calibrated through the choice of parameter values that reflect
specific features of the U.S. economy, and then free parameters are chosen
such that 3 fewer varieties are imported at the 7.1 percent tariff than at the 2.7
percent tariff. The parametric inputs are reported in table D-7.
6 This reflects the upper range of the 1-3.5 range. Because the experiment is aimed at
identifying possible upper bounds on variety type effects, the largest discrete number in
this range is chosen as a calibration input.
D-13
Table D-7
Parameter inputs into model calibration
Parameter
Description
Value
L
β
σ
t0
t1
F0
Economy-wide labor supply . . . . . . . . . . . . . . . . . . . . .
Share of tradeable good in consumption1 . . . . . . . . .
Elasticity of substitution2 . . . . . . . . . . . . . . . . . . . . . . .
1+simple average tariff in 20013 . . . . . . . . . . . . . . . .
1+simple average tariff in 19783 . . . . . . . . . . . . . . . . .
Common component of fixed labor
charge4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variety-specific component of fixed labor
charge4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1000
0.15
8.26
1.027
1.071
µ
0.2741
0.001
1
Ratio of imports to GDP; USITC calculations and Bureau of Economic
Analysis.
2 Average elasticity of substitution at comparable level of aggregation,
David Hummels, “Toward a Geography of Trade Costs,” Purdue University
monograph, 1999.
3 USITC calculations based on Department of Commerce data.
4 Calibrated fitted values.
Results
Once calibrated, the simulation model is shocked by changing the tariff
from its 2001 value of 1.027 to its 1978 value of 1.078. The model has been
calibrated so that this tariff change causes the number of U.S. import varieties
to fall from 58 to 55. Utility is calculated for three outcomes: the initial
equilibrium,
the counterfactual equilibrium
, and for the counterfactual outcome with variety held
constant
The experiment most similar to that considered in chapter is 7 is a
comparison of the initial equilibrium and the counterfactual equilibrium with
variety held constant. A comparison of U1 and U0 indicates that when the
relative price effects of tariff changes are considered alone, returning tariffs to
1978 levels would reduce U.S. welfare by 0.04 percent. Comparing Ui1 and U0
allows an estimate of the total welfare gains (relative price and variety effects).
In this scenario, returning to 1978 tariffs would reduce U.S. welfare by 0.15
percent. Variety effects account for approximately 3/4 of the total welfare
change induced by the tariff change.
D-14
APPENDIX E
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E-17
APPENDIX F
Hearing Witnesses and Views of
Interested Parties
F-2
Positions of Interested Parties
This section summarizes the views of interested parties submitted to the
Commission in connection with the investigation, either at the hearing or in
written statements. The original statements can be viewed at the USITC
Electronic Document Information System web site, http://edis.usitc.gov. These
summaries do not reflect the views of the U.S. International Trade Commission
or any individual Commissioner.
AFL-CIO1
The AFL-CIO is a voluntary federation of 65 national and international
labor unions that represent 13 million workers.
U.S. trade policies have resulted in “exploding trade deficits and staggering
job losses, especially in [the] manufacturing sector; significant impingement on
the power of the national government and state and local authorities to regulate
in the public interest; and dilution of protections under domestic trade laws.”
The United States should “go back to square one” and recraft its trade policies
“to ensure that they promote and protect workers’ rights and the environment
in the United States and other nations.”
Uruguay Round
The U.S. trade deficit in goods and services nearly quadrupled during
1994-2002 and these deficits have substantially retarded GDP growth. Growing
trade deficits have also eliminated a net total of 3 million actual and potential
jobs from the U.S. economy. Most (65 percent) job losses were in the
manufacturing sector. Displaced workers in import-competing sectors have had
difficulty finding jobs in growing sectors. Further, real manufacturing wages
have not kept pace with the cost of living.
These factors have affected local businesses and have eroded state and
local tax bases. The Uruguay Round Agreements (URA) have negatively
affected the power to regulate in the public interest as the WTO dispute
resolution procedures have challenged domestic laws and regulations design to
protect the environment, health and safety, consumers, or workers. The URA
has also weakened the substance of U.S. trade laws and reduced the ability to
effectively implement these laws. If global competition remains unchecked, it
will make the world increasingly “unstable” by creating greater inequality and
“weaker democracies.”
1
F-4
AFL-CIO, written submission to the Commission, Feb. 14, 2003.
NAFTA
NAFTA has been a “dismal failure” and workers’ wages in all three
NAFTA countries have fallen or stagnated. The trade surplus that the United
States had with Mexico before NAFTA is now a deficit and the deficit that it
had with Canada is now much larger. These deficits eliminate job
opportunities. NAFTA also has caused jobs to shift from “relatively
high-paying manufacturing jobs with good benefits and higher union density to
service sector jobs that pay less and provide fewer benefits.” The effect has
been particularly negative on the textile and apparel sector and the automotive
goods sector. Wage disparities between manufacturing production workers in
Mexico and the United States have increased, encouraging U.S. production to
shift to Mexico and undocumented Mexican workers to move to the United
States. “NAFTA has also made it less risky and more lucrative to move
production to Canada and Mexico” thereby “undermining the bargaining
position of U.S. workers.”
Air Transportation Association2
The Air Transportation Association (ATA) is the principal trade and service
organization of the U.S. scheduled airline industry.
Of the 5 subject trade agreements, only the URA covers commercial air
transport although the ATA generally supports all of these and other
agreements that liberalize trade with foreign partners. However, some free trade
agreements, such as the U.S.-Singapore FTA, cover express delivery services
similar to those provided by certain ATA members. Even so, there is not yet
industry consensus on this approach to liberalization.
The URA, particularly the General Agreement on Trade in Services
(GATS), covers limited aspects of commercial air transportation. The GATS
Annex on Air Transport Services covers three sub-sectors, two of which the
United States has taken exemptions on. ATA supports the U.S. government
position that liberalization of air transportation services can best be achieved
under the current, broad exclusion from the GATS of most activities in this
sector. ATA believes that the existing venues and mechanisms for air transport
liberalization are sufficient.
2
Edward A. Merlis, Senior Vice President, Legislative and International Affairs, Air
Transportation Association written submission to the Commission, Jan. 21, 2003.
F-5
American Brush Manufacturers
Association3
The American Brush Manufacturers Association (ABMA) is a diverse
group of businesses made up of 162 member manufacturers and affiliated
supplier companies that has represented broom, brush and mop manufacturers
since 1917.
A significant amount of U.S. corn broom production was lost to Mexico
after NAFTA took effect due to high labor content of the product. Three of the
four largest U.S. companies have either moved all, or a significant amount, of
their production to Mexico and most of the smaller U.S. manufacturers (or
former U.S. manufacturers) now import part or all of their finished products
from Mexico. In each instance NAFTA has caused “vanishing profits and
dwindling workforces” in the U.S. corn broom industry.
American Forest & Paper Association4
American Forest and Paper Association (AF&PA) is the national trade
association of the forest, pulp, paper, paperboard, and wood products industry.
In its view, tariffs are the principal factor impairing the competitiveness of the
U.S. forest products industry, and it believes that “no progress has been made
on multilateral tariff elimination in the wood products sector and only partial
progress has been achieved in the paper sector.” Regional FTAs to which the
United States is not a party have only exacerbated the competitiveness problem
by shutting out the U.S. industry from those markets. Besides tariffs, foreign
sanitary and phytosanitary (SPS) measures and producer subsides also create
significant U.S. competitive disadvantages for this sector. In general, U.S.
exports have fallen in recent years, according to the AF&PA, because of the
downturn in the Japanese housing market, the strong U.S. dollar, and other
macroeconomic factors.
Tokyo and Uruguay Rounds
These Rounds led to declines or elimination of U.S. tariffs in this sector
without corresponding cuts by trading partners, “locking in” a U.S. competitive
3 David C. Parr, Executive Director, American Brush Manufacturers Association,
written submission to the Commission, Feb. 14, 2003.
4 Jacob Handelsman, Senior Director, International Trade, and Elizabeth Ward,
Executive Director, Wood Products International, American Forest & Paper Association,
written submission to the Commission, Mar. 31, 2003.
F-6
disadvantage. In particular, the failure to achieve “zero-for-zero” cuts in
wood products tariffs with Japan has put the U.S. industry at a disadvantage.
Developing countries also have not liberalized their markets or industries, to
the detriment of the U.S. industry. Subsidies in both developing and
developed economies abroad continue to create competition for U.S. exports.
SPS disciplines negotiated in the Uruguay Round are important to the
industry and AF&PA opposes any attempt to evade such disciplines, such as
attempts by the EU to block U.S. trade with SPS measures based on other
than scientific grounds.
NAFTA
Mexico is an important market for U.S. wood products, because there is
limited domestic production in Mexico. However, the lengthy staging-in period
for Mexican tariff reduction has limited U.S. exports below what they might
otherwise have been. The strong dollar vis-a-vis competing exporters in
low-cost countries has also hurt U.S. export potential in Mexico. On the other
hand, U.S. paper product exports to Mexico have been “thriving.”
American Restaurant China Council5
The American Restaurant China Council (ARCC) is a trade association
that represents a substantial majority of U.S. Commercial Chinaware
production.6 The ARCC member companies are Buffalo China, Inc., The Hall
China Company, and The Homer-Laughlin China Company.
Tokyo and Uruguay Rounds
The Tokyo and Uruguay Round tariff reductions led to large surges of
low-priced imports that eroded U.S. market share for commercial chinaware.
Following the Tokyo Round tariff reduction on commercial chinaware from
48-percent to 35-percent, product imports increased more than eightfold to
nearly five million dozens during 1979-1994. These imports captured a
5 Susan Esserman and Melanie Schneck, Steptoe & Johnson, LLP on behalf of the
American Restaurant China Council, written submission to the Commission, February
14, 2003.
6 Commercial chinaware (HTS 6911.10.10 and HTS 6912.00.20) is “especially
designed for use by hotels, restaurants, and other commercial establishments and
institutions that require stronger, thicker, more durable and more sanitary chinaware.”
F-7
substantial share of the U.S. market, resulting in either the transfer or shut
down of a number of U.S. manufacturers operations and the loss of hundreds
of American jobs. Imports continued to increase during the Uruguay Round
tariff reduction staging to over 6.8 million dozens by year end 2000,
dropping to 5.8 million dozens in 2001 due to the U.S. economic slowdown.
This flow of U.S. imports is not offset by significant U.S. export
opportunities due largely to high tariff rates overseas, onerous testing and
certification requirements, and national preferences to buy domestic
production, particularly in Europe.
The U.S. Government has historically recognized that commercial
chinaware is an import sensitive product by limiting the industry’s tariff
reduction requirements during the Tokyo Round and by granting a 10-year
staged reduction in the Uruguay Round.7 During this time, the industry made
significant capital improvement investments to lower production costs and
increase efficiency in an effort to ensure its future competitiveness. However,
the commercial chinaware market remains intensely price sensitive and any
future tariff elimination or accelerated tariff reduction would threaten the U.S.
industry’s survival. ARCC also states that maintaining import tariffs for
commercial chinaware would have no discernible effect on consumers
(restaurants and hotels) because it is generally recognized that the cost of
chinaware represents an insignificant part of their (the consumers’) operating
costs.
Association of the Nonwoven
Fabrics Industry8
The Association of the Nonwoven Fabrics Industry (INDA) is the trade
association of the nonwovens industry, a multi-billion-dollar business in the
United States and abroad. INDA members are involved in the manufacture of
nonwoven roll goods and production of primary materials and machinery used
to create nonwovens. INDA members also include companies that convert
nonwoven roll goods into finished products such as disposable baby diapers,
surgical drapes and gowns, filtration materials, wiping products, construction
materials, geotextiles, and numerous other end-use applications.
7 The U.S. Government limited the tariff reduction to no more than 25 percent of the
original tariff during the Tokyo Round. Ten-year staged reductions were also provided
under NAFTA, and more recently the U.S.-Jordan Free Trade Agreement. Also, the U.S.
Government refused to review petitions to include commercial chinaware to the
Generalized System of Preference during the 1984, 1986, 1987, 1990, 1991 and 1992
review exercises.
8 Jessica Franken, Government Affairs Associate, Association of the Nonwoven
Fabrics Industry, written submission to the Commission, March 31, 2003.
F-8
The unilateral phaseout of U.S. tariffs on nonwoven roll goods during the
Uruguay Round, which went from a high of 16 percent in 1994 to zero as of
January 1, 1999, has been at least partially responsible for a dramatic
narrowing in the gap between U.S. imports and U.S. exports of nonwoven roll
goods (as measured in kilograms) over the past six years. Imports of nonwoven
roll goods to the United States increased more than 140 percent during
1996-2001, while U.S. exports have risen by a more modest rate of 59 percent
over the same period. The United States exported 162 percent more nonwoven
roll goods than it imported during 1996, although by 2001 that gap had
narrowed such that the U.S. exported 72 percent more nonwoven roll goods
than it imported. Given these trends, INDA is concerned that imports of
nonwoven roll goods to the U.S. will match, and perhaps exceed, U.S. exports
within the next few years.
“The nonwovens industry has often been regarded as one of the few bright
points within the struggling textiles sector of the U.S. economy, but these duty
imbalances threaten to reverse that trend.” INDA requests that the USITC
reflect in its investigation the difficulties its industry has experienced as a result
of the elimination of tariffs of nonwoven roll goods during the Uruguay Round.
Benjamin Goodrich9
Benjamin Goodrich is employed by the Institute for International
Economics. However, the views expressed in his submission are his own and
do not necessarily reflect the views of individual colleagues or the members of
the Institute’s Board or Advisory Committee.
Mr. Goodrich generally holds a favorable view of all the subject trade
agreements. His submission emphasizes a number of points for the
Commission to keep in mind when evaluating the effects of the subject trade
agreements on the U.S. economy. It also discusses the merits and shortcomings
of various economic models that can be used to estimate the counterfactual
condition expressed as “What would the U.S. economy look like if the United
States had not implemented a certain trade agreement?”
Blue Diamond Growers10
Blue Diamond Growers is a nonprofit farmer-owned marketing cooperative
that markets almonds, hazelnuts, macadamia nuts, and pistachios for its
9 Benjamin Goodrich, Institute for International Economics, written submission to
the Commission, Jan. 3, 2003.
10 Susan Brauner, Director of Public Affairs, Blue Diamond Growers, written
submission to the Commission, Mar. 27, 2003.
F-9
members. The almonds are grown exclusively in California and are the
largest tree crop in the State. Almonds are the largest valued agricultural
export from California. Over 75 percent of the world’s supply of almonds is
produced in California.
Tokyo Round and Uruguay Round
Blue Diamond Growers (BDG), and almonds in general, benefitted
significantly from the Tokyo and Uruguay Rounds. These agreements opened
markets for almonds worldwide. As a result of these two agreements, U.S.
almond exports increased by 25 percent to Europe, 1,100 percent to Eastern
Europe, 300 percent to the Middle East, and 200 percent to Asia during
1996-2002.
U.S.-Israel Free Trade Agreement
BDG, and almonds in general, benefitted from the United States-Israel Free
Trade Agreement until the agreement was renegotiated in 1995. U.S. almond
exports were adversely affected by the 1995 changes which increased duties on
U.S. exports of almonds to Israel by a factor of four thereby closing the market
for U.S. exports. In 1997, a TRQ was applied which allowed limited access of
almonds to Israel, but was too restrictive to provide meaningful amounts of
trade. BDG believes that if all barriers to trade with Israel were removed,
almond exports to Israel would grow from about $10 million in 2002 to about
$25 million within five years.
U.S.-Canada Free